Sectoral & thematic funds are making everyone good money. Time to bite?

Since 2023, more than half of new funds - 92 of the 167, to be precise - are sectoral and thematic funds; investors have pumped in more than Rs 55,000 crore in these new launches. You get the idea: these funds are hot. The others, at best, are meh.

Why is that the case? These funds are raining down not because it's the monsoon but because the fund houses have to play by the rules. In 2017, SEBI, the markets regulator, dictated that fund houses could launch just one fund per category. (Examples of categories are large caps, mid caps, small caps, flexi caps, among others).

However, there were no such strict rules to launch thematic and sectoral funds, which means fund houses could launch one tourism fund, one defence fund, one consumption fund and so on.

As a result, sectoral and thematic funds are springing up like mushrooms. Case in point: since 2018, 190 new sectoral and thematic funds have launched, over 40 per cent of the total launches.

Sectoral and thematic funds' high returns

These funds are walking the talk on the performance front, too. For example, PSU (government-owned companies), Infrastructure and Defence have delivered returns upwards of 55 per cent in the last 12 months, prompting investors to jump on this gravy train.

Plus, this market is witnessing a broad rally. It's a fancy way of saying that every sector and theme in this country has done well in the post-pandemic era.

But will this trend continue?

Sectoral and thematic funds can be inconsistent

That's the bad bit about them. These funds can have serious highs and lows. That's exactly what the below heatmap will show you.

• Banking was a top performer in 2014, returning 63 per cent gains, only to become a bottomfeeder the following year, delivering -7 per cent returns.
  
• Infrastructure delivered the highest returns in 2017 but fell down the ladder the next year.
  
• Technology faced a similar fate in 2021 and 2022.

You get the point: one day the king, the next day a pauper.

One may argue that the PSU has been a standup sector since 2022. But we'd suggest you look at its previous performance. It languished in the bottom half for multiple years. In other words, one needed to have a high-risk appetite and oodles of patience to endure negative or subpar returns for a few years.

Flexi-caps: A better alternative

You'd notice flexi-cap funds have been consistent performers, often ranking in the middle to upper tiers of the heatmap.

Moreover, flexi-cap funds diversify (spread) investors' money across different sectors, including banking (current exposure at 27 per cent), technology (13 per cent), consumer discretionary (13 per cent), among others. It means that these funds are not held hostage to the performance of one particular sector or theme. As a result, they provide growth as well as stability.

Our take

Well-diversified funds like flexi-cap funds are a better option, as sectoral and thematic funds have historically blown hot and cold because they rely on the performance of one sector or theme.

Multi-cap and large-cap funds are two other examples of diversified mutual funds. You can choose to invest in them based on your risk profile.

Also read: Energy-sector mutual funds: Right time to invest?