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Sectoral and thematic funds, considered highly risky due to their seasonality, are drawing the most number of new millennial investors to the mutual fund (MF) fold.
A report by CAMS, registrar and transfer agent (RTA), shows that MF schemes that punt on a particular sector or an investment theme, have been the most popular among first-time millennial investors since financial year 2021 (FY21).
In the just-concluded year 2022-23, 21 per cent of new millennial investors started their MF journey with these schemes.
According to experts, MF investment platforms gaining prominence amid a rally in equity market post the onset of covid played a key role in bringing sectoral and thematic schemes to the limelight.
"There could be two factors. Firstly, most millennial investors are coming to the MF industry though online investment platforms and hence tend to invest in the top-performing schemes listed there and these lists are often dominated by sectoral funds. Secondly, some millennial investors would be coming with a trading mindset and looking to benefit from an expected turnaround or upside in a sector or a theme," said Mohit Gang, co-founder & CEO, Moneyfront.
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Sectoral and thematic funds are often at the top of the returns chart but the sector and theme keeps changing, making them riskier than broader MF offerings like flexicap, multicap and largecap schemes. For instance, MF schemes investing exclusively in Nifty PSU Banks have delivered the highest return in the one-year period. However, this performance has come after years' of underformance. So much so that they are still the worst-performing domestic equity fund in the 10-year period with just three per cent annualised returns.
"Selecting funds based solely on their past performance may not be suitable for sectoral and thematic funds. These funds focus on particular sectors and themes, so timing is critical for entry and exit to account for business cycles. Popular funds from recent years may not always be the best choice and investors should be cautious of relying solely on past performance to make investment decisions,” said Jiral Mehta, Senior Research Analyst, FundsIndia.
The craze for sectoral and thematic funds may not be limited to the first-time millennial investors (those born between 1981 and 1996). The category received the highest net inflows among all active equity schemes in FY 2023 at Rs 23,780 crore. Smallcap funds received the second highest net flows at Rs 22,100 crore.
Analysts feel the strong inflows into riskier schemes are tantamount to investors betting for the long term. “Active m-cap-based MF portfolios saw a much higher degree of buying by mid- and small-cap funds, compared to large-cap funds. This indicates a propensity to add ‘size risk’ by domestic investors,” ICICI Securities said in a recent report.
