NFOs Drive Investments in Thematic Funds

The current financial year FY25 belonged to the sectoral or thematic funds. Almost 50% of the equity mutual fund inflows have gone into these funds. For investors, it is important to understand why so many thematic funds are getting launched and what it means for them. Let us look at the details for a better understanding.

Launch of Thematic NFOs

Equity mutual funds have received Rs 2.04 lakh crore inflow in FY25 (till September 2024). Of this, 47.3% or Rs 96,489.33 crore went into thematic funds, with a flood of new fund offers (NFOs) fuelling the flows.

In the first half of FY25, 30 active equity NFOs were launched. Of these, 22 were thematic funds. Manufacturing, special opportunities, and business cycle funds are among the themes that have attracted investors.

Among these funds, Motilal Oswal Mutual Fund launched four funds. WhiteOak Capital Mutual Fund and Bandhan Mutual Fund came up with three funds each. SBI Mutual Fund, Kotak Mutual Fund, and Invesco Mutual Fund launched two funds each.

List of Thematic Funds Launched in FY25

Below is a list of thematic funds launched in FY25 (April 2024 to September 2024):

• LIC MF Manufacturing Fund
• WhiteOak Capital Digital Bharat Fund
• Bandhan Business Cycle Fund
• HSBC India Export Opportunities Fund
• Invesco India Technology Fund
• Axis Consumption Fund
• Bandhan BSE Healthcare Index Fund
• Bank of India Business Cycle Fund
• Motilal Oswal Business Cycle Fund
• SBI Innovative Opportunities Fund
• Invesco India Manufacturing Fund
• Motilal Oswal Manufacturing Fund
• Edelweiss Business Cycle Fund
• ICICI Prudential Energy Opportunities Fund
• Kotak Special Opportunities Fund
• Baroda BNP Paribas Manufacturing Fund
• Aditya Birla Sun Life Quant Fund
• Sundaram Business Cycle Fund
• Motilal Oswal Quant Fund
• SBI Automotive Opportunities Fund
• Samco Special Opportunities Fund
• HDFC Manufacturing Fund

Performance of thematic funds

In FY25, so far, sectoral and thematic funds have offered an average return of 2.63%. Mirae Asset Hang Seng TECH ETF FoF gave the highest return of 33.07% in FY25, followed by Edelweiss Gr China Equity Off-Shore Fund, which gave a 17.17% return in the same period.

Below is the performance of NFOs opened in FY25:

Why are AMCs introducing thematic funds?

Here are some of the key reasons why AMCs in India are introducing thematic funds:

• Investor Demand: Investors are increasingly seeking investment opportunities that align with their specific interests and beliefs. Thematic funds offer a way to invest in sectors that are expected to benefit from long-term trends and growth drivers.
• Market Opportunities: India's economy is rapidly growing, and there are numerous sectors with significant potential for growth. Thematic funds can provide investors with exposure to these emerging sectors.
• Innovation: Thematic funds can encourage innovation and investment in new and emerging sectors, contributing to economic growth and development.
• Lack of Opportunity: Small and mid-cap stocks are overvalued. Also, the inflow into the equity sector has been good (and growing) in recent quarters. AMCs are launching thematic funds to push the money into the new funds that can meet investors' specific needs.

Things to know before investing in thematic funds

Below are a few things to note before investing in thematic funds:

Understanding the fund: Thoroughly research the underlying theme and its potential drivers. A "green energy" fund may invest in renewable energy, electric vehicles, and energy-efficient technologies, covering multiple industries under the clean energy theme. Do your research to assess the long-term viability and growth potential of this sector before moving forward.

High Risk, High Reward: Thematic funds are often more volatile than diversified equity funds because they are heavily exposed to specific sectors or trends. If the theme performs well, the fund can generate high returns. However, if the theme underperforms due to macroeconomic factors or regulatory changes, the fund may face steep losses. Hence, thematic funds are more suitable for investors with high-risk tolerance.

Research and Expertise: Investing in thematic funds requires a solid understanding of the theme. You need to assess:

• Market Potential: Does the theme have long-term growth potential, or is it driven by short-term trends?
• Regulatory Environment: Are there favorable government policies or regulations supporting the theme?
• Global Trends: Are international markets aligned with the theme (e.g., global demand for clean energy or digital transformation)?

Final Word

Investors should be careful before investing in thematic funds. Look for sectors that have growth scope.