Surge in thematic mutual funds: A closer look at emerging investment opportunities
The surge in inflows into thematic funds is capturing the attention of both seasoned and new investors. Nikhil Rungta, Co-CIO of Equity at LIC Mutual Fund, shares his insights on what’s driving this trend, which sectors are benefiting, and how investors can manage risks in the rapidly growing thematic fund space.
Thematic funds gain popularity amid strong economic growth
The rise in thematic fund inflows is largely fueled by India’s robust economic performance and investor interest in specific growth sectors.
“Investors are eager to capitalise on emerging trends and growth sectors,” says Rungta. “Themes tied to India’s economic growth, such as manufacturing, infrastructure, and technology, have become particularly appealing.”
Government initiatives like the Production Linked Incentive (PLI) schemes have further amplified this interest. These policies support manufacturing, boosting investor confidence in the sector.
“Thematic funds offer a diversified exposure to these themes, allowing investors to mitigate risks compared to single-sector investments,” he adds.
Currently, sectors such as consumption and technological innovation are attracting the most attention, with investors seeking targeted growth opportunities in these areas.
NFOs lead the charge in thematic fund inflows
New Fund Offerings (NFOs) have become a significant driver behind the surge in thematic fund inflows. In the first half of FY25 alone, thematic funds raised ₹51,078 crore through NFOs, accounting for about 71% of the total NFO collections in India.
“This shows that NFOs are playing a pivotal role in the increase of thematic fund inflows,” Rungta points out.
Existing thematic funds are also seeing substantial investments, but the majority of the inflow is being driven by the launch of new thematic funds that cater to investor demand for focused, high-growth sectors.
Key sectors attracting investment
Several sectors are witnessing a surge in investment, particularly in manufacturing and infrastructure.
Manufacturing-themed funds attracted nearly 28% of total thematic fund inflows, amounting to approximately ₹19,500 crore. Infrastructure funds also gained traction, accounting for about 8% of inflows, equivalent to ₹5,900 crore.
“These sectors are benefiting from government support and have delivered impressive returns, further drawing investor interest,” says Rungta.
Other sectors like defense and public sector undertakings (PSUs) have also posted strong returns, exceeding 55% in the past year.
This performance is supporting investor confidence in these themes, pushing them to the forefront of thematic fund strategies.
Shifting focus: Traditional sectors to emerging themes
Rungta observes a shift in investor focus, with many moving away from traditional sectors like banking and turning towards emerging themes such as artificial intelligence (AI) and green energy.
“The rapid growth of AI and the potential of green energy are driving this shift,” he explains. “Investors are looking for long-term growth opportunities in these sectors.”
Additionally, the infrastructure sector is expected to undergo significant transformation, driven by ongoing and planned projects aimed at improving connectivity and urban development.
These developments are positioning infrastructure funds as strong investment options.
A balanced approach to managing risk
While thematic funds are attractive, they can also be concentrated in specific sectors, making them prone to volatility.
Rungta advises investors to diversify their portfolios by balancing thematic investments with broader equity or debt funds. “It’s important to regularly review and rebalance the portfolio to avoid overconcentration in any one theme,” he recommends.
Thematic funds can be volatile, so they are better suited for investors with a higher risk appetite and a long-term investment horizon.
“It’s also important to keep track of economic trends and government policies that can influence these themes,” he adds.
Diversifying across multiple themes
Investors looking to diversify across multiple thematic funds should be selective. Rungta suggests allocating 10-20% of the portfolio to thematic funds, depending on individual risk tolerance.
“These funds should complement a core portfolio of diversified equity and debt funds, helping investors gain targeted growth potential while maintaining stability,” he advises.
Regular portfolio rebalancing and aligning investments with long-term financial goals are key to ensuring that thematic fund exposure is both strategic and sustainable.
Knowing when to exit a theme
Evaluating the lifecycle of an investment theme is crucial for successful investing.
Rungta explains that themes often evolve through stages: growth, mainstream adoption, and maturity.
“During the growth phase, there is high potential for returns, but also higher volatility,” he says. “As the theme matures, growth stabilizes, and returns may plateau, signaling a potential exit point.”
Investors should consider exiting when the theme’s fundamentals weaken, such as slowing growth or increasing competition, or when other sectors present better opportunities. “Regularly reviewing market conditions and aligning with personal financial goals helps determine when to exit a theme,” Rungta concludes.