India's mutual fund industry is witnessing a remarkable contradiction as asset management companies aggressively launch thematic and sectoral funds despite clear signals of waning investor interest in these products. Data reveals a significant disconnect between fund houses' enthusiasm and retail investors' cautious approach toward theme-based investments.
Sharp Decline in Thematic Fund Collections
According to data from the Association of Mutual Funds in India, capital raised through thematic new fund offers (NFOs) witnessed a dramatic 52% decline in the 12 months ending October 2025. The total collection stood at approximately ₹33,712 crore, down significantly from the previous year's figures.
More importantly, the share of thematic and sectoral funds in overall NFO collections dropped to 42% from 62% in the previous year, indicating a substantial shift in investor preference. This decline becomes even more pronounced when examining the contribution of thematic funds to total equity inflows, which shrank from a commanding 40% to a mere 15% within just one year.
Why AMCs Continue Thematic Fund Launches
Despite the clear cooling of investor enthusiasm, mutual funds introduced 45 new thematic and sectoral NFOs in the 12 months to October 2025, virtually unchanged from the previous year's 44 launches. This persistent push occurs even as the total number of all NFOs rose modestly from 222 to 232 during the same period.
Industry experts point to regulatory constraints as the primary driver behind this trend. Srikanth Meenakshi, co-founder at PrimeInvestor, explains: "When it comes to thematic funds, you can have as many thematic funds as you want, and every new launch of a fund is an opportunity for an AMC to incentivize distributors and get assets."
The regulatory framework bars mutual funds from having more than one scheme in categories such as large-caps and mid-caps, but this restriction doesn't apply to thematic funds, sectoral funds, index funds, ETFs tracking different indices, and fund of funds having different underlying indices.
Performance Concerns and Investor Caution
The lukewarm investor response extends beyond NFOs to the entire universe of existing thematic and sectoral funds. Net inflows into these funds plunged by 58% in the 12-month period, settling at ₹58,317 crore from over ₹1.4 trillion a year earlier.
In stark contrast, traditional diversified equity categories saw substantial growth. Large-cap funds witnessed net inflows surge by 80%, mid-cap funds by 70%, and small-cap funds by 51%, clearly indicating where investor confidence currently lies.
A Mint analysis of data from Value Research and NSE on active thematic funds reveals concerning performance trends. Over 60% of new active thematic funds launched in the past year have underperformed their respective benchmarks over the six months ending October 2025.
Expert Advice for Retail Investors
Financial advisors are cautioning retail investors against falling for the hype surrounding thematic funds. Abhishek Kumar, founder and chief investment advisor at Sahaj Money, advises: "I do not advise investors to invest in thematic funds as they are often based on a story. They should not fall for the hype, but rather should focus on long-term investing. The whole point of investing is to diversify, not bucketize."
Experts suggest that new investors should stick to diversified equity schemes, while sophisticated investors might consider thematic exposure as a tactical allocation, preferably limited to 5-10% of the overall equity portfolio. The consensus advises timing the entry when the theme is out of favor or valuations are reasonable, with a willingness to stay invested through full market cycles.
Among the notable thematic and sectoral schemes launched this year, the biggest include HDFC AMC's Innovation Fund with AUM of ₹2,730 crore, ICICI Prudential's Quality Fund with ₹2,253 crore, and ICICI Prudential Rural Opportunities Fund with ₹1,944 crore, according to scheme disclosures made by AMCs.
