Making Sense of Thematic MFs During Market Swings

The recent market rally has once again brought thematic and sectoral mutual funds into the spotlight. These funds invest in specific sectors or themes—like renewable energy, public sector undertakings (PSUs), or infrastructure—with the aim of capturing high-growth opportunities. While they can deliver impressive returns, their narrow focus also makes them riskier than diversified funds.

Thematic funds tend to perform well during periods of high market activity. For example, PSU and energy funds have historically rebounded strongly after market corrections. Post the 2020 crash, ESG (Environmental, Social, Governance)-focused funds gained sharply as interest in sustainability grew. However, these funds can also suffer steep losses when their chosen theme underperforms. A recent case is the underperformance of infrastructure-themed funds, hurt by project delays and rising costs.

One of the biggest challenges in investing in thematic funds is timing. Many investors jump into thematic funds after a strong rally, often buying high and selling low during downturns. SEBI data shows that in 2023, over 60 per cent of flows into thematic funds came when markets were near their peaks. Predicting when a theme will recover is difficult, and these funds generally require a long holding period—ideally 5 to 7 years—to ride out market cycles.

That's why we suggest keeping thematic funds limited to 10–15 per cent of your overall portfolio. They should support your core diversified holdings, not replace them. Systematic Investment Plans (SIPs) can help reduce timing risk by spreading out your investments.

In summary, while the current market mood may tempt investors to chase themes, it's important to stay disciplined. Match your investments to your risk profile, focus on long-term trends, and avoid following the crowd.

Shashikant Singh
Executive Editor