Sector & thematic funds: Investors with high risk appetite should stay put

Inflows into sector and thematic (S&T) funds fell sharply from around ₹5,711.6 crore in February 2025 to about ₹170.1 crore in March 2025 — a decline of 97 per cent. With many such funds underperforming, investors need to assess whether to remain invested or exit.

 

What triggered the drop

 

The primary driver has been weak market performance. “The Nifty’s sharp fall from its peak of 26,277 in September 2024 to around 22,000 in early March 2025 spooked investors,” says VK Vijayakumar, chief investment strategist, Geojit Investments.

 

Fund houses had earlier attracted inflows into S&T funds through new fund offers (NFOs), a strategy that is now losing traction. “When the market rallies, NFOs do well, and fund houses capitalise on that,” says Vijayakumar. He adds that many S&T funds launched in 2024 have underperformed, deterring investors.

 

Redemptions surged 55 per cent — from around ₹5,752 crore in February to nearly ₹8,920 crore in March 2025. “Investors put in money when returns are high and pull out when returns dip. Many S&T funds have posted negative returns, with some suffering losses of up to 26 per cent in 2025, prompting withdrawals,” says Rajani Tandale, senior vice-president–mutual fund, 1 Finance.

 

Many first-time investors, who had entered during the bull run, have exited. “With several popular segments falling by more than double the most-followed benchmarks, fear has taken over,” says Abhishek Tiwari, executive director and chief business officer, PGIM India Asset Management Company.

 

Common investor missteps

 

Many investors enter S&T funds based solely on recent returns. “They ignore valuations and long-term prospects,” says Vijayakumar.

 

These funds also come with concentration risk and limited flexibility. “Sector funds typically have 60–70 per cent of their portfolios in 5–10 stocks from a single sector. Fund managers cannot exit even if the sector underperforms. They also miss out on opportunities in other sectors,” says Tandale.

 

Success in such funds hinges on entering and exiting at the right time. “Misjudging market cycles can lead to substantial losses,” says Tarun Birani, founder and chief executive officer, TBNG Capital Advisors.

 

Why diversified funds make more sense

 

Diversified funds are better suited for core equity exposure in the current environment. “In a volatile market, the drawdowns in sector funds tend to be sharper than in diversified strategies,” says Tiwari. He suggests investing in diversified categories like flexicap, multi-cap, and large-and-mid-cap funds. Hybrid options — such as multi-asset, equity savings, and balanced advantage funds — can also help mitigate risk by diversifying across equity, debt, and commodities.

 

Who should stay invested

 

Tiwari suggests that those invested in structural themes should stay put. Those in funds focused on domestic consumption may also hold on. “Investors in healthcare, public sector undertakings, and financials may remain invested, while those in technology funds should consider exiting,” says Vijayakumar.

 

Informed investors with a high risk appetite — who can monitor trends — may continue. “They should be able to assess macroeconomic indicators and policy shifts; compare sector valuations with historical averages; analyse earnings prospects; and factor in international influences,” says Birani. Those with an advisor may also choose to stay put.

 

These funds are best held in the satellite portion of a portfolio and should comprise 5–12 per cent of the equity allocation.

    Sector funds that have declined the most over six months                                                                 Returns (%) 

Fund	6-month	1-year	3-year	5-year	10-year
Aditya Birla Sun Life Transportation and Logistics Fund	-20.7	-2.1	NA	NA	NA
Tata Digital India Fund	-20.6	1.1	6.2	29.7	NA
Tata Infrastructure Fund	-20.2	-6.5	19.6	31.8	14.0
Aditya Birla Sun Life Digital India Fund	-20.2	-1.2	5.4	28.2	16.5
Quant Healthcare Fund	-18.8	6.4	NA	NA	NA
Quant Commodities Fund	-18.0	2.3	NA	NA	NA
LIC MF Infrastructure Fund	-17.8	12.3	24.5	34.0	14.2

*Returns above one year are compound annualised.  Source: Navigation RA