Investor exodus? Sectoral funds see 88% drop in inflows in January 2026

Net inflows into sectoral/thematic funds drop by 88.44% on year-on-year basis at Rs 1042.56 crore in January 2026

After two years of blockbuster flows and aggressive investor participation, sectoral and thematic mutual funds are witnessing a sharp slowdown. According to ICRA Analytics, net inflows into these funds plunged nearly 88.44% year-on-year to ₹1,042.56 crore in January 2026, compared with ₹9,016.60 crore in January 2025. The decline signals a decisive shift in investor sentiment as performance cools and volatility returns to the market.

 

Despite the sharp fall in fresh inflows, the category’s overall size remains substantial. Net assets under management (AUM) stood at ₹5.24 lakh crore in January 2026, up 13.63% from ₹4.61 lakh crore a year ago. 

 

 

Over the past five years, AUM has grown at a CAGR of 42.54%, expanding from ₹89,007 crore in January 2021. However, the growth momentum now appears to be moderating.

 

The primary driver behind the slowdown is performance fatigue. 

 

“Inflows into sectoral and thematic mutual funds have declined due to a combination of performance-related issues, market-driven factors, and shifting investor sentiment,” said Ashwini Kumar, Senior Vice President and Head – Market Data, ICRA Analytics. Several thematic strategies have struggled to outperform benchmarks as sector cycles reversed, leading investors to reassess concentrated bets. 

Net AUM & total inflows of sectorial & thematic funds 

Net AUM & total inflows of sectorial & thematic funds

   

The shift is visible in allocation trends. Sectoral and thematic funds accounted for just 4.34% of total net inflows into open-ended equity-oriented funds in January 2026, sharply down from 22.72% in January 2025 and 22.06% in January 2024. At their peak in May and June 2024, these funds captured over 55% of total equity inflows. The steep moderation indicates a broad retreat from concentrated sector exposure toward more diversified strategies.

 

There are 248 sectoral/thematic funds currently available in the market. The average returns on these funds are 6.28%, 18.60% and 17.00% on a 1-year, 3-year and 5-year basis, respectively.

 

Many retail investors, particularly those who may have been mis-sold thematic ideas without fully understanding the volatility involved, are using market rebounds to liquidate their holdings, further contributing to reduced fresh investments, said the report.

 

“Sectoral and thematic funds are likely to remain volatile and highly cyclical in the near term due to external uncertainties and recent performance corrections. However, the long-term outlook for select themes, particularly those supported by government policy and structural economic drivers, remains constructively positive. The category is expected to see slower but more sustainable inflows, with investors becoming more selective and data-driven,” Kumar said.

 

Volatility and Macro Risks Add Pressure

 

Heightened volatility in mid-cap and small-cap segments, currency depreciation, global macro uncertainties, and trade-related risks have further dampened investor appetite for high-risk thematic strategies. With 248 sectoral and thematic funds currently available, the category remains crowded and cyclical.

 

Return data also reflects cooling momentum. Average returns stand at 6.28% (1-year), 18.60% (3-year), and 17.00% (5-year) — respectable over the medium term but weaker compared to the strong rally phase that previously drove inflows. Many retail investors who entered during the peak cycle are reportedly using market rebounds to exit positions, especially if they were mis-sold concentrated themes without fully understanding volatility risks.

 

What Lies Ahead?

 

ICRA Analytics expects the category to remain volatile and cyclical in the near term. However, select themes backed by structural growth drivers and government policy support may continue to attract selective capital. Instead of broad-based exuberance, the next phase could see slower but more sustainable inflows, driven by informed and data-driven investors rather than momentum chasing. 

Net flow of sectoral & thematic funds, as a % of total net flow of open-ended equity-oriented funds

Net flow of sectoral & thematic funds, as a % of total net flow of open-ended equity-oriented funds

 

For investors, the message is clear: sectoral and thematic funds can offer outsized gains during strong cycles, but they demand timing discipline, diversification, and risk awareness.