Thematic funds top MF menu, but investors don't have a taste for them

Capital raised through thematic NFOs in the 12 months ended October 2025 plunged 52% from a year earlier, totalling around ₹33,712 crore, data from the Association of Mutual Funds of India showed. Further, the share of thematic and sectoral funds in overall NFO collections declined to 42% from 62% the previous year.

Yet, the pace of launches barely missed a beat.

Mutual funds introduced 45 new thematic and sectoral NFOs in the 12 months to October 2025, virtually unchanged from the previous year's 44. This push comes even as the total number of all NFOs rose modestly from 222 to 232 over the same period.

Heart of the matter

According to industry experts, the contradiction stems from a regulatory stricture barring mutual funds from having more than one scheme in categories such large-caps and mid-caps. However, the restriction does not apply to thematic funds and sectoral funds, index funds, ETFs tracking different indices, and fund of funds having different underlying indices. This prompts asset managers to craft schemes focusing on specific themes or sectors to attract new investors, as they are not subject to this restriction.

"When it comes to thematic funds, you can have as many thematic funds as you want, and every new launch of a fund is an opportunity for an AMC to incentivize distributors and get assets," said Srikanth Meenakshi, co-founder at PrimeInvestor.

Juzer Gabajiwala, director at broking firm Ventura echoed this sentiment, calling thematic launches an effective tool for asset mobilization and visibility, especially for fund houses aiming to maintain growth momentum amid a saturated product landscape.

Among the thematic and sectoral schemes launched this year, the biggest are HDFC AMC's Innovation Fund (AUM of ₹2,730 crore), ICICI Prudential's Quality fund ( ₹2,253 crore), and ICICI Prudential Rural Opportunities Fund ( ₹1,944 crore), as per scheme disclosures made by AMCs.

Not just NFOs

The lukewarm interest in themes and sectors isn’t restricted to NFOs; net inflows into the entire universe of existing thematic and sectoral funds - while still higher than other categories—plunged 58% in the 12-month period, settling at ₹58,317 crore from over ₹1.4 trillion a year earlier. In stark contrast, traditional, diversified equity categories—large-cap, mid-cap, and small-cap—saw net inflows surge by 80%, 70%, and 51%, respectively.

The outcome: Thematic and sectoral funds' contribution to total equity inflows shrank from a commanding 40% to a mere 15% in a year.

“The moment the markets turn volatile, especially with a negative bias, investors turn cautious and they either stop or redeem when they see a slight dip in their investments. Some investors even re-route their redemption proceeds from categories like thematic, sectoral, to large-cap, flexi-cap, and multi-asset funds," said Manmeet Singh Khurana, distributor, founder at Wealth Dopes, also a certified financial planner.

Khurana said that AMCs should assess investor demand and sentiment better given the potential market size for each new launch like in other consumer-facing industries. Simply launching schemes would only add to the long tail of products, he said, with some of these unable to meaningfully contribute to topline or bottomline.

Easy to sell

According to Ventura's Gabajiwala, thematic products are also easier for the distribution network to market. "There are more talking points for distributors in a thematic fund to convince investors. From a business strategy point of view, it definitely works for AMCs; otherwise, they wouldn’t be doing it," PrimeInvestor's Meenakshi added.

The launches allow distributors to position new funds during different market cycles, tailoring a narrative that resonates with the latest market trends. However, a Mint analysis of data from Value Research and NSE on active thematic funds suggests their performance often fails to live up to the promise. Over 60% of the new active thematic funds launched in the past year have underperformed their respective benchmarks over the six months ending October 2025.

Industry figures caution against short-term performance judgment. "Thematic funds can’t be assessed through steady-state comparisons with benchmarks because their returns tend to be lumpy and depend on cycles where the theme performs," said Umeshkumar Mehta, director and chief investment officer at Samco Mutual Fund.

Investor caution

Financial advisors, meanwhile, caution retail investors against falling for the hype.

"I do not advise investors to invest in thematic funds as they are often based on a story. They should not fall for the hype, but rather should focus on long-term investing. The whole point of investing is to diversify, not bucketize," said Abhishek Kumar, founder and chief investment advisor at Sahaj Money.

Experts suggest new investors should stick to diversified equity schemes. "For sophisticated investors, thematic exposure should be viewed as a tactical allocation, preferably limited to a small fraction— 5-10% —of the overall equity portfolio. The consensus advises timing the entry when the "theme is out of favor or valuations are reasonable, with a willingness to stay invested through full market cycles to capture the complete thematic opportunity," Gabajiwala concluded.