Sectoral & thematic funds: Boom or bubble?

Aal izz well, Aamir Khan sang in 3 Idiots, and that's a motto strongly embraced by this market. Sectoral and thematic funds, in particular, have struck a chord with investors. An epic Rs 70,000 crore has been plunked into them in just the first six months of 2024. That's almost 300 times 3 Idiots' nationwide box office collection (not adjusted for inflation), over 110 times Chandrayan-III's moon-mission budget and double that of the Ministry of External Affairs' allocation to send aid to many countries, including Bhutan, Nepal and our tetchy island neighbour, the Maldives. You get the point - sectoral and thematic funds are hitting the right notes. But what happens when the music eventually stops? Let's first revisit 2018. At the time, there were 82 sectoral and thematic funds managing Rs 75,000 crore in assets. Since then, more than 200 such funds have mushroomed, with assets topping Rs 5 lakh crore, a six-fold surge. The entire mutual fund industry, which itself has seen a meteoric rise during this period, pales in comparison by growing three times. The roots of these funds' exponential growth can be traced back to 2017. That's when the capital markets regulator, SEBI (Securities and Exchange Board of India), reset the mutual fund landscape. It effectively restricted fund houses to launch just one fund per category, except for index funds/ETFs (exchange-traded funds), FoFs (fund of funds) and crucially, sectoral and thematic funds. This opened the floodgates for sectoral and thematic funds. Remember Motilal Oswal's micro-cap fund or the money-magnet HDFC Defence Fund of 2023? This year is the story of the Manufacturing and Energy-focused funds. What's more, when these funds are backed by a good marketing story and solid recent performance, you have people making a beeline for them. Investors of a certain vintage will recall the flurry of Technology funds in the late 90s and early 00s as well as the Infrastructure funds during the bull run of 2003-07. For those who haven't been around the block long enough, this is just a case of history repeating itself. Ideally speaking, these funds should be launched when a specific sector is down in the dumps. It would encourage investors to buy fund units during market lows and enjoy the perks of a boom. But let's face it, there'll be few takers for a fund

This article was originally published on August 15, 2024.