Sectoral and thematic mutual fund inflows soar 187% in February. Is the spike driven by NFOs and selective buying?

Sectoral and thematic mutual funds saw a sharp jump of 187% in monthly inflows in February, to Rs 2,987 crore, compared with Rs 1,042 crore in January, according to the monthly data by Association of Mutual Funds in India (AMFI).

Market experts said that this jump came from new launches or reflects investors opportunistically entering select sectors at relatively attractive valuations rather than a broad-based surge in demand across all sectoral funds.

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Amitabh Lara, Executive Director, Anand Rathi Wealth Limited shared with ETMutualFunds that most of that flow came from new fund launches, not from a wave of investors rushing into existing funds and such trends are common in this category, as NFO activity, market narratives, and short-term sector optimism often attract investor attention, especially when certain themes are in focus.

Sagar Shinde, VP Research at Fisdom told ETMutualFunds that this should not necessarily be interpreted as a broad-based revival in investor interest as the YoY data still indicates steep declines compared to the strong flows seen earlier, suggesting that overall participation in this category remains relatively moderate.

“Flows are not coming uniformly across all sectors; instead, investors appear to be targeting specific pockets where valuations have corrected or where long-term themes remain intact.”

Shinde further said that there has been some incremental buying in IT funds after the recent correction, along with continued interest in certain thematic strategies that are tied to structural growth stories. Therefore, the recent surge likely reflects investors opportunistically entering select sectors at relatively attractive valuations and positioning for themes that have delivered strong performance, rather than a broad-based surge in demand across all sectoral funds.

Performance tracking

On a yearly basis, the inflows declined by 48% from Rs 5,711 crore in February 2025, the AMFI data further showed.

Excluding international funds from the list, other sectoral and thematic funds gave an average return of 1% in February. Around 12 funds lost over 10% in the month of February and all were technology sector based funds.

Aditya Birla SL Digital India Fund lost the most of around 16.5%. Invesco India PSU Equity Fund lost the lowest of around 0.07%.

SBI Automotive Opportunities Fund offered the highest return of around 8% in February. Shriram Multi Sector Rotation Fund was the last one to deliver positive returns as the fund gave 0.06%.

Sectoral and thematic funds, which had been witnessing a steady surge in inflows over the last two years, lost their sheen amid performance-related issues, market-driven factors, and shifting investor sentiment in January, according to ICRA Analytics.

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Chasing returns or investment strategy?

Shinde said that the flow pattern suggests that a large part of the recent allocations into sectoral and thematic funds is tactical rather than part of a long-term core allocation strategy and investors often tend to increase exposure when certain sectors or themes either deliver strong recent performance or witness valuation corrections that create entry opportunities.

“Currently, the flows appear to be selective and theme-specific rather than broad-based, which indicates that investors are positioning for particular sectors rather than making structural allocations to the entire category. Overall, this behaviour suggests that investors are largely rotating between themes and sectors based on market cycles and valuation opportunities, rather than adopting sectoral and thematic funds as a permanent core portfolio allocation,” Shinde added.

Amitabh Lara said the recent inflows into sectoral and thematic funds appear more cyclical and event-driven rather than a structural shift in investor allocation and as markets started recovering in 2026, many AMCs launched new sectoral and thematic NFOs, which led to higher inflows in the category.

At the same time, when seen on a year-on-year basis, inflows into the category are still lower by around 47%, indicating that investor participation in sectoral/thematic funds has actually declined, he claimed.

Sectors at risk to offer better long-term opportunities

According to a report by Shriram Wealth, India's reliance on energy imports (both oil & gas) has remained elevated over the years - posing upside risks through imported inflation. The Department of Economic Affairs, in its monthly note stated that if the crisis persists, it could have material implications for the exchange rate and CAD. "Subdued capital flows, accentuated by a flight to safety, could put pressure on the currency. Sectors dependent on energy and crude, like fertilizers and petrochemicals , could be affected if the crisis is prolonged."

Another report by Shriram AMC said that sectors such as Ceramics & Building Materials, Fertilisers & Chemicals, City Gas Distribution (CGD), QSR / Food delivery, Consumer Durables & EMS, LNG terminals/ Gas Marketers, Auto / Auto Ancillaries are the sectors that are at risk amid the ongoing geopolitical tensions.

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Whereas the sectors such as Upstream Oil & Gas, Standalone Refiners, Metals (Aluminium, Steel) are the sectors that may benefit from this geopolitical tension, the report by Shriram AMC said.

Amitabh Lara said that from a macro perspective sectors like infrastructure appear strong for the long term, supported by the government's sustained favorable policy on capex, push for manufacturing, and domestic growth initiatives. The infrastructure sector is additionally diversified across sub sectors such as metals, cement, construction, capital goods, engineering, with steady policy support and public spending, these all stand to gain.

To this, Shinde said from our perspective, a temporary correction or moderation in valuations alone should not be the primary basis for allocating to sectoral or thematic funds, sectoral strategies tend to be cyclical and concentrated and therefore require strong conviction on earnings visibility rather than just price corrections so at this stage, we would prefer to remain relatively cautious rather than deploy aggressively into sector or theme-based funds.

While recommending to adopt staggered or phased approach for allocation rather than making lumpsum investments, Shinde said that we continue to remain positive on areas such as banks and financial services, capital market–linked businesses and broader financialisation themes, which benefit from long-term drivers like rising household participation in financial assets, credit growth and deepening capital markets.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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