The newest fad in mutual fund multiverse: Sectoral Funds. Here's why you should not over-invest in them

The deluge of funds in sectoral, or thematic funds continued unabashed in September, with investors pouring in Rs 13,254.63 crore via 183 schemes into this category, as AMFI data showed. In August too, investors had put in Rs 18,117.18 crore via 179 schemes here.

The trend has been going strong since July, 2024, which saw sectoral funds garner Rs 18,386.35 crores via 174 schemes. In August, 5 new thematic funds were launched on the momentum, which raised Rs 10,202 crore. Last month saw the launch of 4 new sectoral schemes, which garnered around Rs 8,000 crore.

However, inflows into equity schemes fell by 10% in September to Rs 34,419 crore, as compared to Rs 38,239 crore in August 2024. Between April and June 2024, equity mutual funds had seen a total inflow of Rs 94,222.27 crore, out of which inflows in sectoral funds (Rs 46,731.17 crore) alone were a whopping 50%.

While the quantum of inflow in equities, and sectoral funds certainly seems to have tapered down a bit, it continues to remain significantly strong, indicating heavy investor interest in this largely risky segment. Over the last year, AMCs have been pumping out more and more NFOs in this space in a bid to get a bigger chunk of investor's money, and also regulations restrict them from launching new schemes under other categories.

However, with the ongoing geopolitical concerns in Middle East, and rising prices of crude oil, the equity markets are set for volatile, uncertain times ahead. However. thematic funds have had a good run so far this year, with YTD (yield to date) of 28.69%, and returns worth 44.71% over the past year.

Says Deepak Ramaraju, Senior Fund Manager, Shriram AMC, "On the prima facie, it looks like investors are concerned about the valuation, increasing geo-political uncertainty and moderation in earnings and hence, we have seen redemption from funds. But we will have to wait for how the global events play out – like the Chinese stimulus, the Fed Decision and the RBI’s MPC policy stance in the months to come".

As such, you should think twice and carefully assess the risks involved before dipping your hands in the gush of sectoral funds right now. While they may be all the rage, identifying the right sector or theme at the right time is a job best done by professionals.

Don't ignore the risks involved

Siddharth Alok, AVP Investments, Multi Ark Wealth-Epsilon Money explains that sectoral funds come with high risk, since they are more vulnerable to sector-specific downturns. This might not suit the risk palate of many investors.

"All markets have cycles, where some sectors naturally outperform while some underperform in the short to medium term. For instance, industrial and consumer discretionary sectors may perform well in a growing economy, while defensive sectors like utilities or healthcare may perform better during downturns".

"To make the most of your investments in sectoral funds, it is essential to time your entry and exit in these sectors, which is a difficult job for a regular investor", he continued.

In order to maximise your returns in thematic funds, either investors i.e. you should understand the dynamics of the underlying sector or theme, or you should have qualified and experienced advisors who can help you take the right decision with regards to such investments. As a matter of fact, you should approach any new funds only after comparing them with similar existing offerings and ensuring their aptness in your portfolio.

As an astute investor, you should understand that such funds offer a very high-risk high return investment proposition and may not fit in the portfolio of every investor. Investing in every NFO (New Fund Offering) without assessing the sector's viability and future growth, merely on the back of its current hype is unadvisable.