Thematic funds surge on NFO wave but can the momentum last? Experts advise caution

For sectoral and thematic schemes, July was a blockbuster month with the cumulative net flows climbing to Rs 9,426 crore, a 1880 percent jump over last month’s net flows of Rs 426 crore. The segment flows were also the highest among all equity categories, as per data from the Association of Mutual Funds in India (AMFI).

According to experts, the spike was primarily driven by a rush of new fund offers (NFOs) promising exposure to niche sectors, innovation themes and factor-based strategies. They, however, also cautioned that the trend is often fuelled more by launch hype than by durable investor conviction, raising concerns of over whether the momentum will hold once the novelty fades.

Interestingly, the July surge has once again brought to the fore the debate on whether investors are genuinely buying into the thematic fund stories or simply chasing the buzz around fresh launches.

The NFOs in the category included Axis Services Opportunities Fund, Bandhan Multi-Factor Fund, HDFC Innovation Fund, ICICI Prudential Active Momentum Fund, Mahindra Manulife Banking & Financial Services Fund, Nippon India MNC Fund and Sundaram Multi-Factor Fund.

Also read: AMFI July data: SIP flows increase to all-time high of Rs 28,464 crore; SIP stoppage ratio at 63%

Shweta Rajani, Head of Mutual Funds at Anand Rathi Wealth, points to the outsized role of NFOs. “In July, NFOs were almost 79 percent of the total net inflows into the category. Last month, when there were no NFOs in this segment, the inflow was just Rs 426 crore. This clearly shows that NFOs have been the main driver of flows, a trend we have seen in earlier months as well. This raises questions about whether these funds can maintain momentum once the initial launch excitement fades,” she says.

Meanwhile, recent performance across themes has been uneven. Data from Value Research shows that banking funds lead in the near term, up 9.38 percent year-to-date and 9.70 percent over one year. Infrastructure has delivered stronger long-term numbers with a 24.40 percent CAGR over three years and 29.71 percent over five years.

Pharma funds have shown modest one-year gains but strong three-year compounding. PSU-focused funds remain long-term standouts, compounding above 32 percent over three years despite short-term pullbacks. Technology has lagged with a 14.54 percent YTD decline and a 7.05 percent one-year drop, while themes like MNC, ESG, Dividend Yield and Energy have mostly trailed benchmarks in the short term.

Rajani notes the cyclical nature of thematic funds. “They often deliver two strong years followed by one or more weaker years, which can weigh on portfolio performance.”

In a similar context, Sachin Jain, Managing Partner at Scripbox, says that historically, the demand for thematic funds has largely been driven by NFOs. “These launches offer fresh themes such as defence, sustainable energy or new-age tech, attracting investors keen to get in early at the Rs 10 NAV. But this novelty often masks the lack of sustained investor conviction,” he says.

Wealth Managers Advise Caution

Investor appetite for thematic funds remains cautious and selective, with wealth managers recommending a measured approach. Experts agree that while thematic fund launches create excitement, they remain niche, tactical plays rather than core portfolio holdings, and sustained success will depend on more than just the allure of a fresh NFO.

“At Anand Rathi Wealth, we advise most clients, especially those not closely tracking markets, to avoid making thematic funds part of their core portfolio, favouring diversified equity for stability instead. Tactical exposure may work for seasoned investors who can enter and exit at the right time,” says Rajani.

Jain shares a similar stance. “At Scripbox, which is primarily a goal-driven wealth management firm, thematic funds feature only in a very selective manner for our most aggressive investors, and even then, allocations remain minimal. Our advisory relies on proprietary algorithms that select funds with strong and consistent track records, a characteristic that NFOs often lack. We seldom receive direct client queries about thematic NFOs, as they do not form a core part of our recommended portfolios,” said Jain.

However, not all AMCs are rushing to join the thematic bandwagon.

Sandeep Bagla, CEO of Trust Mutual Fund told Moneycontrol, “Thematic funds are popular because they allow concentrated bets on specific sectors. But for long-term investment, I prefer diversified funds where the manager has greater discretion to decide sector allocations. SEBI’s categorisation rules limit AMCs to one fund per category, so some of these themes are more marketing-oriented than investment-led. While sectors like power generation or hospitality have merit, I believe investors should primarily stick to diversified funds.”

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