Investors betting big on higher-risk equity funds for better returns

Nearly one in two equity mutual fund (MF) accounts, or folios, are now in the three riskiest categories — sectoral and thematic, smallcap, and midcap funds — thanks to the growing penetration of online investment platforms and investors’ preference for top-performing funds. 

These categories have accounted for the bulk of new accounts in recent years. Since November 2022, sectoral, midcap, and smallcap funds have collectively added nearly 39 million folios, which is 65 per cent of the total additions to equity funds over the past two years. 

This surge has led to a major reshuffle in the folio pecking order, with these three higher-risk categories now occupying the top slots. Earlier, largecap-oriented funds, such as equity-linked savings schemes (ELSS), largecap funds, and flexicap funds, held the lead in folio counts. 

“Investors are usually drawn to categories with higher returns. Over the past four years, midcap and smallcap funds have consistently outperformed largecap and other categories of schemes, rewarding investors with superior returns," said Radhika Gupta, managing director and chief executive officer (CEO) of Edelweiss Asset Management. 

“Sectoral and thematic funds have also gained traction due to their strong performance and the launch of numerous new funds, attracting significant subscriptions,” Gupta said. 

The multifold rise in high-risk investment accounts also reflects in net inflow data. Smallcap, midcap, and thematic funds have cornered the majority of inflows in recent years. In the first 11 months of 2024, these categories have together garnered ~2 trillion, or 56 per cent of total equity fund inflows.

  Marketsmojo Group CEO Amit Golia said the increased risk-appetite of newer investors was also leading to higher interest in these schemes.

 

“The factors include investor optimism during bullish market phases, superior recent performance of these funds, and a growing appetite for higher returns among younger, more risk-tolerant investors. Additionally, economic recovery, sector-specific growth stories, and increased financial awareness have driven interest in these categories,” he said.

Smallcap and midcap funds, along with select thematic funds, have been the top-performing MF schemes across timeframes over the past two-three years. According to experts, most investors using online platforms select funds largely on the basis of past performance.

 

In the case of thematic funds, the jump in folios is also linked to a record number of fund launches in this category over the past two years. “Between November 2023 and November 2024, equity new fund offerings (NFOs) collected about ~88,000 crore across 68 schemes, of which ~73,346 crore came from 47 sector funds. NFOs usually attract new folios, both by existing and new investors,” said Sriram BKR, senior investment strategist, Geojit Financial Services.

 

In addition, funds like ELSS have their own reasons for the decline in investor interest. Experts say the introduction of the new tax regime has dented the fund category as investors opting for the new regime get no tax benefits by investing into ELSS.