Sectoral and Thematic Funds Gain Popularity As Investor Preferences Shift

Sectoral and thematic funds have emerged as the dominant investing categories, attracting significant inflows and outperforming traditional large-cap active funds. A recent report from DSP Mutual Fund reveals that these funds have delivered impressive returns, averaging 24 %, with some top performers reaching up to 40 %.

In contrast, large-cap active funds have witnessed a decline in inflows, receiving less than Re 1 out of every ₹10 in net inflows into active funds over the past six years. This shift in investor preferences reflects a growing interest in sector-specific and thematic investment opportunities.

Once considered the domain of experienced investors with specific goals, sectoral and thematic funds have gained widespread popularity, attracting inflows not only in broad sectors and themes but also in more granular sub-industry groupings. Market experts attribute this surge in demand to the unique investment opportunities offered by these funds, catering to investors with diverse risk profiles.

The consistent performance of small and mid-cap (SMID) funds over the last few years has played a significant role in driving inflows into this asset class. Investor behaviour typically follows returns, and the shift towards SMID funds post-2020, coinciding with the onset of the COVID-19 pandemic, is a testament to this trend. Prior to 2019, large-cap funds exhibited relatively stronger performance compared to other segments.

When analysing the average compounded annual growth rate (CAGR) returns of these asset-class funds over the past five years, the superior performance of sectoral and thematic funds becomes even more evident. Their average return of 24 %, with some reaching 40 %, far surpasses the returns of other fund categories.

Given the current trends, investors may question whether it is the right time to allocate funds to large-cap investments. The growing popularity and strong performance of sectoral and thematic funds suggest that they may offer more attractive opportunities for investors seeking to capitalise on specific market trends and sectors.

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Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.