If the equity market was rife with blockbuster initial public offerings (IPOs) in 2020, the mutual fund industry was busy rolling out new fund offers (NFOs). The industry had launched over 40 open-ended equity schemes in 2020. As you may be aware, the market witnessed a severe crash in March amid the pandemic crisis, which resulted in subdued investor sentiment. Thus, most funds houses lined up their new launches in the second half of the calendar year when the market started to recover from the lows.

You see, mutual funds have often taken advantage of optimism in the market to launch new products and plug the gap in existing product range. This time it was no different. And investors are now willing to enter the market during this uptrend buoyed by improving returns.

Interestingly, instead of the vanilla funds, it is the thematic funds that seem to have caught the industry’s fancy this time. Fund houses are increasingly trying to attract investors with new strategies and unique/innovative products.

Since mutual funds are permitted to launch only one scheme per category, mutual funds have been rolling out various theme-oriented funds. Notably, fund houses can launch more than one thematic fund provided that it caters to different themes/strategies.

Here are some of the themes that are gaining preference among the mutual fund industry:

ESG – Environmental, Social, and Governance (ESG) investing is a theme that aims to identify companies that score high on ethical parameters. It is a popular concept globally and is gradually gaining momentum in India. The theme works on the principle that a company conscious about its environmental, social, and governance footprint can be expected to grow sustainably. Kotak MFAditya Birla MFMirae Asset MFAxis MFICICI Pru MF, and Quant MF have recently joined the ESG bandwagon.

Special situations – Regulatory changes, technological or other disruptions, dynamic macroeconomic environment, etc. can result in temporary mispricing of stocks. Such situations can provide opportunities to identify companies that stand strong even in the face of adversity; and thus prove to be valuable long term bets. Axis MF and Aditya Birla SL MF each launched a scheme in this category.

Global – Over the past few years we have observed a ‘Digital Revolution’ that has changed the way consumers work, shop, and spend their leisure time. Notably, many of the companies that capitalised on the Tech boom are listed on overseas exchanges. Hence, domestic fund houses are launching schemes with an investment mandate to tap the investment opportunities in the overseas market. Axis MFMotilal Oswal MFInvesco India MFKotak MF, etc. were among the fund houses that have launched funds focusing on overseas markets.

What’s more?

A significant number of the newly launched schemes have opted for the Passive/Fund of Fund route of managing the portfolio to keep the cost low.

The new launches come at a time when equity funds have been witnessing outflows for the past six months. This makes one wonder whether the new schemes were launched keeping in mind investors’ interest or just to garner more assets…

Are these schemes worthy of your hard-earned money?

Not all unique products are worthy of your investment.

Investors would be better off investing in diversified equity funds that have a long-term track record and score high on quantitative and qualitative parameters.

Invest in a thematic/sectoral fund only if it offers diversification and unique proposition that cannot be fulfilled by investing in diversified equity funds.

It is important to note that the portfolio of thematic schemes is usually concentrated towards few stocks and/or sectors which makes them high risk -high return investment proposition.

The risk can intensify further if you invest in a thematic scheme with no track record. If you are looking to invest in thematic funds select the one that has a proven track record of healthy performance across market cycles.

Certain themes like ESG are expected to catch up in the domestic market in the future and can be considered to be part of your portfolio provided there is no duplication in its portfolio as compared to your existing schemes.

Ideally, the allocation to thematic/sectoral funds should not exceed 10-20% of your portfolio depending on your risk appetite, financial goals, and investment horizon.

As more schemes get launched, it can become difficult for you, the investor, to sift through the bouquet of offerings and pick the truly worthy one/s. Keep in mind that if you add too many schemes to your portfolio, it will become difficult to monitor its performance and eliminate the laggards.

This article first appeared on PersonalFN here

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