Sectoral, thematic fund inflows fall 88% YoY as volatility spurs shift to diversified bets

Sectoral and thematic mutual funds are witnessing a sharp slowdown in fresh inflows as prolonged market volatility and underperformance relative to benchmarks prompted investors to reassess concentrated bets, said experts. Net inflows into the category plunged 88.44 percent year-on-year to Rs 1,042.56 crore in January 2026 from Rs 9,016.60 crore a year earlier, according to data from ICRA Analytics. The segment’s share in total net inflows into open-ended equity-oriented funds also dropped to 4.34 percent from 22.72 percent a year ago, a steep fall from over 55 percent at its peak in mid-2024, according to the report. Volatility, underperformance weigh on flows Ashwini Kumar, senior vice president and head – market data at ICRA Analytics, said the decline reflects underperformance and the inability of several schemes to consistently beat their benchmarks. “As sector cycles reversed and mid- and small-cap segments witnessed heightened volatility amid currency depreciation and global macro concerns, investor appetite for high-risk, concentrated strategies weakened,” he noted, adding that the category’s inherently cyclical nature has amplified the impact of broader market turbulence. Pravin Kulkarni, founder of UPInvest, a mutual fund distributor, and international wealth manager added that sectoral and thematic funds are inherently cyclical and highly volatile. “That when combined with geopolitical tensions and broader instability the shift in investor behaviour away from these funds becomes easier to understand,” he noted. AUM resilient; performance uneven Despite weaker fresh inflows, assets under management (AUM) in the category rose 13.63 percent year-on-year to Rs 5.24 lakh crore in January 2026 from Rs 4.61 lakh crore a year earlier. Over the past five years, AUM in sectoral and thematic funds has expanded at a compound annual growth rate of 42.54 percent, reflecting strong long-term accumulation even as near-term flows have moderated. Performance in January 2026 remained largely negative across several schemes, though losses were generally less severe than in the same month last year. Data from Ace MF shows that Axis Business Cycles Fund fell 2.04 percent, DSP Business Cycle Fund declined 1.06 percent and HDFC Manufacturing Fund slipped 3.72 percent. Momentum and innovation-focused strategies such as Axis Momentum Fund, Motilal Oswal Manufacturing Fund, SBI Innovative Opportunities Fund and UTI Innovation Fund also posted declines. The one-year average return across the category stood at 6.28 percent. However, some PSU and international strategies delivered positive returns. HDFC Defence Fund rose 3.45 percent, while SBI PSU Fund and ICICI Prudential PSU Equity Fund gained over 2 percent each. Franklin Asian Equity Fund and ICICI Prudential US Bluechip Equity Fund also posted gains. Fewer NFOs add to pressure Anand Rathi’s Head of Mutual Funds, Shweta Rajani said the fall in the segment’s share in total equity inflows reflects a clear shift in sentiment amid heightened volatility and global uncertainties. She also pointed to the slowdown in new fund offers (NFOs) in the thematic space as a structural reason for weaker flows. “In 2024, the category witnessed four to five NFOs every month, often mobilising Rs 4,000–5,000 crore. With investor appetite moderating and volatility persisting, the pace of launches has reduced significantly, directly impacting incremental flows,” she said. Experts suggest a balanced approach to the segment. Kulkarni noted that even high-risk investors are now turning cautious. “New investments are moving toward diversified funds, while existing holdings in thematic and sectoral funds are largely being maintained,” he said, advising that exposure to such funds should ideally be capped at around 10% of portfolios. Rajani added that sectoral and thematic funds “tend to undergo cyclical performance and increase concentration risk,” suggesting investors consider diversified equity categories that offer broader exposure across sectors and market capitalisations to better navigate market cycles. Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.