Huge flows into sector, thematic MFs make wealth managers edgy

Mumbai: Wealth managers are worried about high flows into sectoral and thematic funds at a time when benchmark indices are trading close to their all-time highs, as many of these schemes have narrow mandates and carry higher risk than diversified equity funds. Some sectors require timing for entry and exit, which retail investors lack, they said. According to experts, the core equity portfolio should be in diversified equity funds, with a small satellite portfolio in sectoral and thematic funds.

As per data from Franklin Templeton, sectoral and thematic funds garnered ₹70,072, or 31% of the total net inflows of ₹2.27 lakh crore, in the past 12 months. This helped make sectoral funds the second-largest equity mutual fund category after flexi-cap funds, with assets of ₹3.37 lakh crore, constituting 13% of the total equity mutual fund assets of ₹25.4 lakh crore.

Wealth managers cautioned investors against randomly putting money into new launches by fund houses. With restrictions on launching new funds in the diversified equity fund category, the only option for large fund houses is to launch thematic funds, as many investors are attracted to new fund offers (NFOs), they said. In the past one year, there have been several thematic NFOs such as HDFC Manufacturing, SBI Energy Opportunities, SBI Automotive Opportunities, Kotak Consumption, Quant PSU and Quant Technology that have generated high interest from investors. Some wealth managers believe investor appetite for risk has increased due to high profits in small- and mid-cap funds. "The risk appetite of investors has increased due to high returns from small-cap funds. We see many of them booking profits in such funds and now moving to sectoral and thematic funds," said Juzer Gabajiwala, director, Ventura Securities.


He cautioned that thematic call for patience and said they would tire investors if the cycle turned around. He reminded that investors in infrastructure funds and PSU funds launched in 2007-08 had to wait many years for their investments to bounce back to their original value.

Some wealth managers, however, said there is a chance to earn higher returns in thematic funds given the strong growth expected in the Indian economy in the coming years.

"These funds help aggressive investors create high alpha on their portfolios and become most attractive when the markets remain sideways," said Nasser Salim, managing partner, Flexi Capital.