Indian Mutual Funds Paradox: Why AMCs Push Thematic Funds While Investors Turn Cautious?

The Indian mutual fund industry is witnessing a peculiar situation where Asset Management Companies (AMCs) continue to launch numerous thematic and sectoral funds, even as investor interest in these new offerings has cooled significantly. Capital raised through thematic New Fund Offers (NFOs) for the year ending October 2025 saw a sharp 52% decline, totalling ₹33,712 crore, with their share in overall NFO collections dropping to 42% from 62%. Despite this, AMCs launched 45 such funds, virtually unchanged from the previous year.

Industry experts point to regulatory nuances: while large-cap and mid-cap categories have a one-scheme-per-category limit, thematic and sectoral funds do not, allowing AMCs to create multiple offerings. This provides opportunities for AMCs to incentivize distributors and gather assets. Juzer Gabajiwala of Ventura highlights these launches as crucial for asset mobilization and maintaining visibility.

This trend is not limited to NFOs; net inflows into existing thematic and sectoral funds also plummeted by 58% to ₹58,317 crore. In contrast, traditional diversified equity funds (large-cap, mid-cap, small-cap) saw inflows surge by 80%, 70%, and 51%, respectively. Consequently, thematic funds' contribution to total equity inflows fell from 40% to 15%. Investors are shifting towards safer, diversified options due to market volatility and performance concerns. Over 60% of new active thematic funds launched in the past year have underperformed their respective benchmarks. Financial advisors caution retail investors against thematic fund hype, recommending diversified schemes for long-term investing and thematic exposure only as a small, tactical allocation (5-10%) for sophisticated investors, ideally when the theme is out of favour.

Impact This news has a significant impact on the Indian stock market by influencing investment flows into equity markets and the performance of asset management companies. Rating: 7/10

Difficult Terms: * Thematic Funds: Mutual funds that invest in a portfolio of stocks belonging to a specific theme or sector, like technology, infrastructure, or commodities. * Sectoral Funds: Mutual funds that invest in stocks of companies operating within a particular industry sector, such as banking, pharmaceuticals, or IT. * New Fund Offers (NFOs): The initial period during which a mutual fund scheme is offered for sale to investors. * Asset Management Company (AMC): A company that manages pooled fund investments, such as mutual funds, and charges a fee for its services. * Assets Under Management (AUM): The total market value of all the financial assets that a financial institution manages on behalf of its clients. * Diversified Equity Funds: Mutual funds that invest in a broad range of stocks across different market capitalizations, sectors, and industries to spread risk. * Benchmark: A standard against which the performance of a security, mutual fund, or investment manager can be measured. * Tactical Allocation: A short-term investment strategy that involves deviating from an investor's long-term strategic asset allocation to take advantage of perceived market opportunities.