The year 2024 proved to be a turbulent one for the Indian equity market. Factors such as geopolitical tensions, geoeconomic fragmentation, inflation, and slowed GDP growth created a volatile investment environment.

Despite this, sectoral and thematic funds continued to capture investor interest, with around 40 New Fund Offers (NFOs) being launched in this category of equity mutual funds. They collectively contributed a substantial Rs 67,772 crore in 2024, a significant leap compared to the 29 NFOs launched in 2023 which contributed Rs 17,946 crore.

Graph 1: No. of NFOs launched under the Sectoral/Thematic Mutual Funds Category in 2024

The securities quoted are for illustration only and are not recommendatory.
Past performance is not an indicator of future returns
Data as of January 04, 2025
(Source: AMFI, data collated by PersonalFN) 

A notable spike is observed in June 2024, with the highest number of NFOs at 9, likely driven by increased investor interest or favourable market conditions during that period. In contrast, January and May recorded minimal activity, suggesting lower focus or demand for thematic funds in those months.

[Read: Sector & Thematic Funds See Highest Increase in Folios]

Moreover, sectoral and thematic funds fetched record inflows of Rs 1.40 lakh for the calendar year 2024.

Graph 2: Rising Inflows & Folios under Sectoral/Thematic Mutual Funds Category

The securities quoted are for illustration only and are not recommendatory.
Past performance is not an indicator of future returns
Data as of January 04, 2025
(Source: ACE MF, data collated by PersonalFN) 

The number of folios exhibit a steady and consistent rise throughout the year, reflecting growing investor participation and interest, peaking at over 2,90,000 by November 2024.

On the other hand, inflows experienced significant volatility, with a sharp increase from March to May and June 2024 alone witnessed the highest inflow of Rs 22,351 crore (as seen in Graph 2), before declining steadily from August onwards. This robust inflow is in stark contrast to the previous year 2023, where sectoral and thematic funds received an inflow of Rs 30,840 crore.

The noticeable rise in the number of folios or mutual fund accounts reveals a key aspect of investor psychology. It appears that investors are increasingly taking calculated risks in the pursuit of higher returns (than some of the traditional investment avenues).

[Read: Thematic Funds Become Market Leaders with Record-High AUM Growth]

The launch of new funds in the sectoral and thematic categories offered investors fresh opportunities to tap into specific and high-growth areas such as pharma and infrastructure. The robust inflows may also be attributed to the investment success observed in sector and thematic funds in the past, owing to factors such as a capex push and reform initiatives like ‘Make in India’.

Let’s take a look at the sub-categories of sectoral and thematic funds that clocked handsome returns in 2024:

Table 1: Performance of Sub-Categories under Sectoral/Thematic Mutual Funds

Sectoral/Thematic Mutual Fund Category	Absolute %	CAGR %
	1 Year	3 Years	5 Years	7 Years	10 Years
Technology	31.12	10.23	27.98	23.96	17.91
Pharma	37.36	19.99	27.94	19.42	14.16
Infrastructure	29.54	26.54	27.15	16.12	15.60
Energy & Power	19.40	20.90	24.56	14.67	16.52
Thematic Funds	23.39	17.70	22.26	13.91	13.62
FMCG	22.84	18.62	19.73	14.53	14.49
BFSI	13.27	14.94	12.31	11.31	11.67

The securities quoted are for illustration only and are not recommendatory.
Past performance is not an indicator of future returns
Data as of January 04, 2025
(Source: ACE MF, data collated by PersonalFN) 

As you can see from Table 1, categories such as Technology, Pharma, and Infrastructure have performed well over both short and medium-to-long-term horizons.

On the other hand, categories such as FMCG and BFSI have demonstrated relatively moderate but stable returns compared to the high-growth sectors. This distinction highlights the varying risk-reward dynamics within sectoral and thematic funds.

Should You Focus on Sectoral and Thematic Funds in 2025?

Sectoral and thematic funds present an enticing investment opportunity due to their potential for high returns. This stems from the concentration of the portfolio towards a set of stocks that are anticipated to perform well.

Investors can capitalise on early-stage trends or sectors with high growth potential, riding the growth wave of industries poised to thrive in the near future.

Thematic funds add a layer of diversification by offering the opportunity to invest across multiple companies and sectors within a single overarching theme. For instance, an infrastructure fund may hold stocks from construction, cement, and power companies, providing a balanced exposure to the broader infrastructure ecosystem.

This blend of focused yet diversified investments can help investors mitigate some risks while benefiting from growth opportunities within a specific theme. In recent years, themes such as green energy, manufacturing, technology, and healthcare have witnessed rapid growth, driven by technological innovations, supportive government policies, and global demand.

Sectoral and thematic funds aligned with these booming industries have the potential to deliver strong returns.

In 2025, emerging themes such as Artificial Intelligence, Electric Vehicles, and rural development are expected to gain traction. These sectors or themes are not only aligned with global trends but are also supported by domestic initiatives encouraging innovation, sustainability, and inclusive growth.

[Read: Best Thematic Mutual Funds for 2025: Power Up Your Portfolio]

However, it is important to recognise that no particular sector or theme can prove to be a multibagger year after year. Each sector or theme undergoes cycles of outperformance and underperformance, which are driven by factors such as changes in government policies, demand conditions, input prices, or other underlying growth drivers.

It is possible that by the time an investor decides to invest in a sectoral or thematic fund, the underlying trend may have already peaked, leaving limited room for further upside.

Additionally, if the underlying market segment or theme loses favour after a period of underperformance, recovery may not happen quickly. And unlike diversified equity funds, sectoral or thematic fund managers have limited flexibility to shift the portfolio away from underperforming sectors or themes.

The concentrated nature of sectoral and thematic funds also increases the downside risk during uncertain or volatile market conditions.

While thematic funds offer more diversification compared to sectoral funds, they are still more concentrated than diversified equity funds. This makes their portfolios sensitive to sector- or theme-specific challenges. For example, an infrastructure fund may face challenges from rising input costs or regulatory hurdles, affecting all companies within the theme.

So, while sectoral and thematic funds have the potential for positive returns over the long term, investing is considered to be highly risky.

Should You Stay Invested or Exit?

Returns in sectoral or thematic funds often swing between thrilling highs and dangerous lows, making it crucial for investors to approach them with caution.

Investing in such funds simply because a fund house has launched a NFO or because historical returns look attractive can be a costly mistake. It’s important to remember that past performance is not a guarantee of future success.

Sectoral and thematic funds are best suited for mature investors who have the ability to evaluate the growth prospects, valuations, and risks associated with a specific sector or theme. These investors should also be capable of making timely decisions on when to enter or exit these funds, as timing is critical to maximising gains and minimising losses.

[Read: These Thematic Mutual Funds Offered Over 50% Returns In 1 Year. Should You Invest in Them?]

On the other hand, investors with limited knowledge or research capabilities, or those who entered these funds merely based on their past performance, might want to reconsider their approach.

For such investors, switching to diversified equity mutual funds may be a wiser decision. They may fare better with a well-diversified portfolio that aligns with their financial goals, risk tolerance, and investment horizon.

This will help them mitigate the impact of severe market downturns and achieve consistent returns across various market cycles.

What Should Be Your Investment Strategy?

If you have a high-risk appetite, willing to accept market volatility in pursuit of higher returns, and have a long-term horizon of 5-7 years or more, you may consider adding some well-researched and promising sectoral or thematic funds to your portfolio.

However, these should ideally be held in the satellite portion of your equity portfolio, with a small allocation of up to 10-12%. This allocation can provide the opportunity for potential alpha generation while containing the overall risk within your portfolio.

Your core equity mutual fund portfolio should mainly consist of some of the best Large Cap Funds, Flexi-cap Funds/Multi-cap Funds, and Value/Contra Funds. Here too, an investment horizon of around 5 years is prudent to allow the funds to realise their full potential and steadily multiply your wealth.

Such a ‘Core & Satellite’ investment strategy can be a practical approach for allocating money into equity funds to achieve your long-term financial goals. While the core portion provides stability, the satellite portion has the potential to enhance the overall portfolio returns.

In addition to equities, it’s wise to diversify your portfolio by allocating resources to debt and fixed-income instruments and gold. Prudent allocation to these asset classes could add stability to your portfolio and may provide protection when equities face turbulent times.

For investors seeking a tactical approach to asset allocation across equity, debt, and gold, a Multi-Asset Fund can be an effective choice. These funds offer diversification within a single investment, wherein you may benefit from different market conditions while maintaining a balanced portfolio.

To Conclude…

Sectoral and thematic funds offer investors the opportunity to align their portfolios with high-growth trends and emerging opportunities. In 2025, themes such as AI and EVs are expected to flourish, driven by technological innovation, supportive government policies, and global demand.

However, the potential success of sector and thematic funds lies in their thoughtful incorporation into a well-diversified portfolio.

By carefully selecting funds that align with your financial goals, investment horizon, and risk tolerance, you can tap into emerging trends while maintaining a stable portfolio poised for long-term growth.

Be a thoughtful investor.

Happy investing!

This article first appeared on PersonalFN here