Explained: Will thematic funds continue to be attractive in 2024?

• AMFI data indicates a heightened investor preference for sectoral/thematic funds
  
• During market upswings, it's typical for investors to lean towards thematic investing, aiming to outperform the market.
  
• Banking, capital goods and infrastructure funds should continue to do well in 2024.
  

Between October 2022 and October 2023, the assets under management (AUM) of sectoral/thematic funds surged by 30% to reach ₹2.18 lakh crore. The allure of attractive returns stands out as just one of the contributing factors driving the increased interest in sectoral/thematic funds.

AMFI data indicates a heightened investor preference for sectoral/thematic funds targeting specific sectors, like PSU companies, over diversified funds encompassing various sectors.

During market upswings, it's typical for investors to lean towards thematic investing, aiming to outperform the market by focusing on specific themes or sectors.

“Sectoral or thematic funds come into focus when the markets are doing well. Now that we have had three years of really good performance by the markets, people want to go down the risk curve,” says Mihir Vora, CFO, Trust Mutual Funds.

In 2023, under thematic funds, the PSU sector has done well giving returns of almost 54%. Under sectoral funds, infrastructure funds have done well. Giving returns of about 40%. Technology funds have done well, giving returns of over 27%. However, the banking sector has underperformed, it has given returns of around 18% but lower than that of PSU or infrastructure funds. Consumption funds have given returns of around 24%.

“Markets go through periods of rotation where different sectors and themes come to the fore from time to time. For instance in 2023, PSU, manufacturing and infrastructure were some of the better performing themes, while consumption, FMCG and financials relatively lagged,” says Kaustubh Belapurkar, director, manager research, Morningstar Investment Research India (formerly known as Morningstar Investment Adviser India).

What can we expect in 2024

Indian thematic funds enjoyed a stellar 2023, fueled by government tailwinds propelling infrastructure and PSU sector and themes. However, as we step into 2024, things might not be the same.

Global economic headwinds may cast a shadow over international themes, demanding cautious navigation. Nonetheless, selective investors, particularly those focused on government-backed initiatives and long-term growth trends, could still unearth alpha-generating opportunities.

“Banking is expected to do well. Capital goods and infrastructure should continue to do well. Plus growth as a style is likely to outperform value unlike this year,” says Vora.

What investors should keep in mind

“Investors are best served by investing in diversified equity funds, where managers will take graded overweight or underweight exposures in sectors depending on their outlook,” says Belapurkar.

Thematic funds are focussed on a few themes or sectors or style. “So it is a little more risky than diversified funds. Basically it should be used by investors who are themselves taking the call of sectors of themes. It is an active call that the investor has to make himself. The investor needs to decide which sector he is bullish on and take a call,” says Vora.

He adds that investors should realise that when the markets have already done well for a long period of time they need to be very conscious that when they are adding thematic funds to their portfolio, they are adding risks at a higher level. So one needs to be very choosy of what one is getting into and really understand the risks.