AMC Incentives Drive New Fund Launches

India's Asset Management Companies (AMCs) are launching a large number of new mutual fund offers, especially in thematic and sectoral categories. This surge seems driven more by AMC business goals than by consistently delivering strong returns for investors. The trend is notable even during India's extended bull market, showing a gap between what active management promises and what investors receive.

How AMCs Profit from New Funds

From 2020 to March 2026, AMCs launched 1,187 New Fund Offers (NFOs), collecting ₹4.67 lakh crore. A large part of this—157 launches raising ₹1.64 lakh crore—focused on thematic and sectoral funds. These funds helped AMCs bypass SEBI's rule limiting them to one fund per category in core segments like large-cap and flexi-cap. AMCs benefit commercially from each launch through distributor commissions, higher Assets Under Management (AUM), and higher fees on active funds. In 2024, AMCs launched 239 NFOs, gathering ₹1.18 lakh crore, aiming to leverage market momentum. However, NFO collections have decreased in early 2025, indicating a possible shift in investor interest.

High Fees and Poor Performance for Investors

The main promise of active equity NFOs—to beat the market while charging higher fees—is not being met for many investors. An analysis of 275 active equity NFOs launched between 2020 and March 2026 found that 133 funds, or 48%, have underperformed their benchmarks. Sectoral and thematic funds show an even higher failure rate, around 50%. This underperformance is worsened by much higher expense ratios: actively managed funds usually charge 1.5% to 2.5% annually, compared to 0.1% to 0.5% for index funds. Funds launched between 2020 and 2024 had over 50% underperformance rates, even during a long bull market. Categories like dividend yield, mid-cap, and ELSS funds reported failure rates of 80%, 73%, and 67%. While value and flexi-cap funds had lower failure rates (29-36%), the overall trend shows a systemic problem. SPIVA India data confirms that over 80% of actively managed large-cap funds have missed their benchmarks for the past decade. Even compared to a simple 7% fixed deposit return, half of these funds have failed to beat this basic benchmark, let alone offer superior risk-adjusted returns.

The Risks of Thematic and Sectoral NFOs

Thematic and sectoral NFOs can be attractive due to their focus on emerging trends, but they carry significant risks. These funds are often launched when investor interest and prices for a theme are already high, making them vulnerable to sharp declines. Their performance is cyclical and highly sensitive to economic shifts, causing large swings. Sectoral and thematic funds also tend to concentrate investments in a few stocks, increasing concentration risk. Research shows sectors and themes don't always outperform broader market indices, and periods of strong performance are followed by significant underperformance. For example, HDFC Defence fund delivered 35% CAGR compared to its benchmark of 52%, and Shriram Multi Sector Rotation Fund lost -23% versus its benchmark's -6%.

Structural Issues: AMC Incentives vs. Investor Outcomes

The continuous launch of NFOs, particularly in thematic areas, highlights a structural mismatch between AMC goals and investor success. The regulatory framework, allowing multiple thematic launches per AMC, combined with revenue from higher fees and distributor commissions, strongly encourages new product introductions. This often leads to funds that are 'new wrappers on old ideas' lacking a track record to judge management quality or strategy consistency. Investors end up paying more for investments that could be accessed more cheaply via existing diversified funds or low-cost index options. Without historical data, evaluating NFOs is difficult, as investors cannot assess performance across market cycles or detect management drift.

Future Outlook and Investor Advice

The market is seeing a shift towards disciplined investing, with Systematic Investment Plans (SIPs) becoming more popular. This, along with growing investor awareness about costs and performance, means NFOs will face more scrutiny. New SEBI regulations aim to create a fairer market by increasing cost transparency and reducing overlapping schemes. Investors should remember that a new fund isn't always a new opportunity. It's best to focus on funds with a proven track record, clear investment goals, competitive fees, and alignment with overall portfolio objectives. Thematic and sectoral NFOs require extra caution; understand their cyclical nature and concentration risks before investing.