Thematic & Sector Funds in India: Surging NFOs, Real Returns, and SEBI’s Tough 2025 Rules
By Kannan M Radhaconsultancy.blogspot.com
Introduction
As of June 2025, sectoral and thematic mutual funds in India have not only surpassed flexi cap funds in total assets under management (AUM)—₹5.09 lakh crore vs. ₹4.94 lakh crore—but also in sheer investor folios, drawing over 3.1 crore accounts compared to flexi cap’s 1.89 crore. This remarkable shift signals a mass movement of investors into concentrated, narrative-driven products, often marketed on recent trends rather than long-term fundamentals. The numbers clearly point to a market where a huge and growing segment of retail investors are being drawn, perhaps unknowingly, into riskier territories—making it more important than ever to scrutinize product suitability and long-term outcomes.
1. Thematic Funds Take Over: A Five-Year Surge
From 2020–2025, AMCs introduced 95 thematic or sector-focused equity funds—raising an unmatched ₹1.76 lakh crore. These launches exploded in bull market years, with 2024 setting records both in new schemes and in headline AUM. Regulatory “gaps” let AMCs flood the market with narrowly-themed, trend-chasing NFOs, promising growth far beyond core equity categories.
Insight: Thematic NFOs now dominate equity fund launches. Most 2024 NFO inflows came from just a handful of hot “story” themes.
2. Did the Sector and Thematic Funds Deliver? Reality Check on Returns
Over the five-year review period, close to 95 sectoral and thematic equity NFOs were analysed and tracked. Only about 35% of these funds have managed to outperform their respective benchmarks over a three-year horizon (among those with a sufficient track record), while roughly 40% posted negative absolute one-year returns as of 2025.
Callout: Despite substantial NFO inflows and high marketing visibility, a significant number of sectoral and thematic funds have failed to consistently beat their benchmarks. Notably, with the Nifty TRI itself delivering near-zero returns in the past year, several funds in this group—such as Axis Quant and Samco Special Opportunities—have recorded negative one-year performance. This underlines the risk of momentum-driven, theme-centric investing when market cycles turn.
3. How Thematic Hype Hurts the Investor
Cycle Mistiming: Funds like Motilal Oswal Manufacturing and HDFC Defence lost value after launching into already “hot” sectors.
AMC Gaps: Nearly every large AMC had at least one sector/thematic fund underperform the market.
Redemptions & Volatility: Many investors exited as soon as the initial performance faded, causing sharp AUM drops just months post-listing.
Concentration Risk & Marketing: Most failures were due to concentrated bets and funds that started with only a story, not a robust strategy.
4. SEBI’s 2025 Rulebook: Ending Thematic Fund Confusion
SEBI’s new 2025 rules put an end to “lookalike” thematic and sector fund launches by capping overlap—no AMC can launch a new theme fund if more than 50% of its portfolio will duplicate one of its own existing schemes. Funds must now deploy all collected NFO money within 30 days and give investors clearer, mandatory disclosures about risks, portfolio overlaps, and historical comparisons. Older funds have a 12-month window to comply.
Why this matters:
This crackdown forces AMCs to offer only genuinely different thematic products, blocks the misuse of “theme slicing,” and ensures your money is quickly invested and transparently managed.
How it helps investors:
You’re now much less likely to get confused, over-exposed, or misled by copycat NFOs. Even if you already own a sector or theme fund, you’ll benefit from clearer, more honest information—making it easier to judge risk and performance, and to avoid being trapped in underperforming or redundant schemes.
5. Investor Takeaways: Who Should Buy Thematic Funds?
Red Flags:
Vague theme (e.g., “New India”, “NextGen”)
Expense Ratio >2%
Dubious peer/benchmark choice
High initial AUM with rapid post-NFO exits
Safe Practice:
Cap thematic allocation at ≤5% of your total portfolio.
Only buy if the theme is supported by data, not just marketing.
Prefer thematic launches from AMCs with at least two successful, mature funds.
Review both short-term (1Y) and 3-year, 5-year returns, not just NFO excitement.
Final Thought: The next NFO pitch you see might be a wealth destroyer in disguise. Don’t chase the story—chase the numbers.
Always evaluate any NFO—sectoral, thematic, or otherwise—through the lens of your own goals and needs.
If it doesn’t fit, it’s wise to skip.
Reach out to us for a review of your current portfolio and receive truly personalized, unbiased recommendations and support.
Disclaimer:
This article is for educational purposes only. Data was researched with AI assistance and cross-verified from reputable sources, including AMFI for category-level details and official sites for scheme-specific data. While care has been taken to ensure accuracy, numbers may vary over time. Always make investment decisions independently—mutual fund investments are subject to market risks.
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