Index funds beat sectoral: 27 new schemes collect over Rs 14,000 cr in Sep

In September 2024, equity-oriented funds attracted a net inflow of Rs 34,419 crore, marking the 43rd consecutive month of positive inflows. Although this is a per cent dip from August's Rs 38,239 crore, investor folios have risen month-on-month. 

"The number of folios also increased by 3.06% from 14.3 crores in July to 14.7 crores in September highlighting the emergence of mutual funds as a preferred investment option among investors, looking to capitalize on the opportunities arising in the Indian equity markets," said Melvyn Santarita, Analyst – Manager Research, Morningstar Investment

Research India.

Index Funds Lead the Charge

Among the various categories of equity funds, index funds emerged as an investor darling. September saw the launch of 13 new index schemes, collectively attracting Rs 3,656 crore. This influx reflects a growing recognition of index funds for their low cost and passive investment strategy, appealing to both seasoned and novice investors alike.

Index funds, which aim to replicate the performance of specific market indices, are increasingly favored for their simplicity and transparency. As market volatility continues, more investors are turning to these funds. 

"There were a plethora of new scheme launches in the month of September 2024, a trend which has been consistent of late. Cumulatively, these 27 new schemes managed to garner INR 14,575 crore during the NFO period. The highest number of schemes were launched in the Index fund category- 13 which cumulatively garnered INR 3,656 crore followed by the sectoral/thematic category which saw the launch of 4 new schemes which garnered Rs 7,842 crore during the month," said Santarita.

Sectoral and Thematic Funds Also Flourish

The Sectoral/Thematic funds category did not lag behind, with net inflows of Rs 13,254 crore, the highest among equity categories for the month.  Notably, the category was also aided by the launch of (Axis Consumption Fund, Bandhan Business Cycle Fund, HSBC India Export Opportunities Fund and Invesco India Technology Fund) which cumulatively garnered substantial net inflows of Rs 7,842 crore.

These sector-specific funds allow investors to focus on particular segments of the economy, catering to those looking to capitalize on niche markets.

But are such NFOs worth it? 

"Investors should be cautious while selecting funds specially from the sector/thematic category. Such funds offer a very high-risk high return investment proposition and may not fit in the portfolio of every investor. Either investors should themselves understand the dynamics of the underlying sector or theme to take a prudent investment decision, or they should have qualified and experienced advisors who can help them take the right decision with regards to such investments. Additionally, they should approach new funds after careful deliberation and comparison with similar existing offerings and ensuring their aptness in the portfolio," said Santarita.

Except for ELSS and focused categories, all the other equity-oriented categories have witnessed strong net inflows during the month. Flexi Cap, Large &  Mid Cap, Mid Cap and Small Cap categories continue to attract huge net inflows. 

The net inflows seen in the mid cap category- Rs 3,130 crore were its highest over a monthly period surpassing the previous high of Rs 3,054 crore which was last month.

After a rather subdued net inflow numbers over the last few months, there has been a re- emergence of net inflows in the Large Cap category. 

"With large cap segment faring relatively better from valuation point of view, investors would have focused their attention towards this category. Besides, large cap funds do add stability to the portfolio during the times of market volatility and this could be another reason for investors to invest in these funds given heightened volatility observed in the markets in the recent times. Additionally, with the valuation high in the mid and small cap segments, some shift towards large caps and large cap biased funds and categories is not surprising," said Santarita.

Moreover, investments in mid and small cap fund should be made based on one’s risk appetite. It is important for investors to note that mid and small cap segments are highly volatile. While they can give exceptionally high return in up markets, they can fall equally hard in down markets. Therefore, investors should take exposure in these funds in line with their risk appetite and invest only with a long-term investment horizon.