Inflows in sectoral and thematic mutual funds decline by 97% in March. Panic or profit-booking?

With sectoral and thematic mutual funds witnessing a decline of 97% in the inflows in March, an expert is of the opinion that the main cause in the drop is an increase in market volatility as a result of which investors panicked and stopped the SIPs and shifted to other performing funds.

“The main cause of this sudden drop in inflows into both sectoral and thematic funds is an increase in market volatility. Most investors seem to chase past returns without considering their risk appetite or the intended investment horizon. As the markets turn volatile, they start panicking, stop SIPs, and transfer to performing funds. In the process, they usually incur exit load and sometimes short-term capital gains, thus impacting their net returns further,” commented Rajesh Minocha, a Certified Financial Planner (CFP), Founder of Financial Radiance.

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Sectoral and thematic mutual funds which have continued to receive highest inflows for a very long time, received an inflow of Rs 170 crore in March against an inflow of Rs 5,711 crore in February. On a year-on-year basis, the inflows dropped by 98% from Rs 7,917 crore in March 2024.

In FY25, sectoral and thematic funds received a total inflow of Rs 1.46 lakh crore of which highest inflow was received in June of Rs 22,351 crore. In March, Motilal Oswal Active Momentum Fund was the only sectoral or thematic fund which was launched and it collected Rs 40 crore.

The total inflow in FY24 was recorded at Rs 46,137 crore. According to AMFI data, these funds saw an outflow in May 2023 of Rs 168 crore. Since June 2023, these inflows were recorded as the lowest inflows in the category.

These funds have continued to gain investors' interest for a very long time and amid the ongoing market volatility, the expert recommends not to go overboard as these funds become risky bets unless the investors have the ability and discipline to time both entry and exit correctly and even instances of well-timed entry and exit could trigger costs such as short-term capital gains tax and exit loads.

“Instead, for most investors, the preferred option would be to focus on diversified categories like flexi cap, multi cap, and large & mid cap funds, where the sectoral allocation is actively managed by fund managers. This would actually lessen the burden for investors and also ensure efficient sector switching already built into the fund's expense ratio,” Minocha recommended.

The total assets under management of sectoral and thematic funds was recorded at Rs 4.55 lakh crore as on March 31, 2025. On a monthly basis, the AUM has gone up by 7%from Rs 4.27 lakh crore in February and on a yearly basis, the AUM has surged by 53% from Rs 2.97 lakh crore in March 2024.

Also Read | Smallcap mutual funds see surge in inflows by 10% despite calls to trim exposure. Midcap funds follow the suit

In March, sectoral and thematic funds offered upto 22% return with HDFC Defence Fund as the top performer. Out of 272 sectoral and thematic funds in the mentioned period, 205 gave positive returns and 25 schemes gave double-digit returns. Around 67 schemes gave negative returns in the same period.

The next two schemes in the list were based on PSU theme. Invesco India PSU Equity Fund and Aditya Birla SL PSU Equity Fund offered 16.54% and 13.38% returns respectively in March. SBI PSU Fund delivered a return of around 12.80% in March, followed by Bandhan Infrastructure Fund which gave a return of around 12.67% in the said period. SBI Energy Opportunities Fund offered a return of around 12.19% in the mentioned period.

Out of 67 schemes which gave negative returns, seven schemes lost in double-digit in March. Nippon India Taiwan Equity Fund lost the most of around 17.18%, followed by Edelweiss US Technology Equity FOF which lost 14.54% in the same period.

Commenting on the outlook, Minocha mentions that sectoral and thematic funds outlook bears uncertainty influenced by global volatility, tariff concerns, and geopolitics and especially in light of looming potential recessions in some major economies, concentrated plays in certain sectors could prove quite risky.

“Most investors would want to consider a diversified approach. Some investors can view sectoral exposure as a very small satellite allocation in one's portfolio. Investment is best done in a boring manner. For excitement and adrenaline rush, there are casinos and other avenues,” he further mentions.

One should not make investment or redemption decisions based on the above exercise. One should always invest based on their risk appetite, investment horizon, and goals.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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