Sectoral/thematic funds losing sheen amid performance-related issues and shifting investor sentiment: ICRA Analytics

Mumbai, Feb 24: Sectoral/thematic funds, which had been witnessing a steady surge in inflows in the last two years, seems to be losing sheen now amid performance-related issues, market-driven factors and shifting investor sentiment, ICRA Analytics said. 

Net inflows into these funds dropped by nearly 88.44% on a year-on-year basis at Rs 1,042.56 crore in January 2026, as compared with Rs 9,016.60 crore in January 2025. Net assets under management (AUM) of sectoral/thematic funds grew by 13.63% at Rs 5.24 lakh crore in January 2026, up from Rs 4.61 lakh crore in January 2025. 

In the last five years, the net AUM has grown by a CAGR of 42.54% from Rs 89,007.40 crore in January 2021. 

“Inflows into sectoral and thematic mutual funds have declined due to a combination of performance-related issues, market-driven factors, and shifting investor sentiment. A major driver has been underperformance and failure to beat benchmarks, which led investors to reassess concentrated thematic bets as returns slowed or turned negative, resulting in a sharp drop in monthly inflows,” Ashwini Kumar, Senior Vice President and Head Market Data, ICRA Analytics, said. 

The net flow of sectoral & thematic funds, as a % of total net flow of open-ended equity-oriented funds dropped to 4.34% in January 2026, as against 22.72% in January 2025 and 22.06% in January 2024. Net flow of sectoral & thematic funds, as a % of total inflows into open-ended equity-oriented funds, went up as high as 55.37% in May 2024 and 55.04% in June 2024 before declining to 0.68% in March 2025 and subsequently moderating to 4.34% in January 2026. Such trend, signals a broad retreat from concentrated sector exposure amid volatile markets and a growing preference for diversification. 

“These categories are highly cyclical, and as sector cycles reversed, fund performance corrected sharply, prompting cautious behaviour among investors who had earlier been attracted by strong historical returns. This caution has been reinforced by heightened market volatility, particularly in mid cap and small cap segments, and broader economic uncertainties such as currency depreciation, global macro concerns, and trade related risks, all of which dampened investor appetite for high-risk thematic strategies,” Kumar added. 

There are as many as 248 sectoral/thematic funds currently available in the market. The average returns on these funds are 6.28%, 18.60% and 17.00% on a 1-year, 3-year and 5-year basis, respectively. 

Many retail investors, particularly those who may have been mis-sold thematic ideas without fully understanding the volatility involved, are using market rebounds to liquidate their holdings, further contributing to reduced fresh investments, he pointed out.

“Sectoral and thematic funds are likely to remain volatile and highly cyclical in the near term due to external uncertainties and recent performance corrections. However, the long‑term outlook for select themes, particularly those supported by government policy and structural economic drivers, remains constructively positive. The category is expected to see slower but more sustainable inflows, with investors becoming more selective and data‑driven,” Kumar said.