Sectoral and Thematic Fund Inflows Decline Sharply Amid Rising Market Volatility

Sectoral and Thematic Mutual Funds Witness Significant Slowdown in Fresh Inflows

Key Highlights:

• Net inflows into sectoral and thematic mutual funds plunged 88.44% year-on-year to Rs 1,042.56 crore in January 2026 from Rs 9,016.60 crore a year earlier.
• The segment's share in total net inflows into open-ended equity-oriented funds dropped to 4.34% from 22.72% a year ago.

Market Volatility and Underperformance Weigh on Flows

Read also: Groww AMC Secures Strategic Boost as SEBI Approves State Street Global Advisors' Minority Stake

Prolonged market volatility and underperformance relative to benchmarks have prompted investors to reassess concentrated bets in sectoral and thematic mutual funds. According to data from ICRA Analytics, the category's inherently cyclical nature has amplified the impact of broader market turbulence. Ashwini Kumar, senior vice president and head – market data at ICRA Analytics, noted that the decline reflects underperformance and the inability of several schemes to consistently beat their benchmarks.

AUM Resilient; Performance Uneven

Despite weaker fresh inflows, assets under management (AUM) in the category rose 13.63% year-on-year to Rs 5.24 lakh crore in January 2026 from Rs 4.61 lakh crore a year earlier. Over the past five years, AUM in sectoral and thematic funds has expanded at a compound annual growth rate of 42.54%.

Performance in January 2026

Read also: Mahindra Manulife Launches MPOWER SIF, Entering the Systematic Investment Fund Segment

Performance in January 2026 remained largely negative across several schemes, though losses were generally less severe than in the same month last year. Axis Business Cycles Fund fell 2.04%, while DSP Business Cycle Fund declined 1.06% and HDFC Manufacturing Fund slipped 3.72%. However, some PSU and international strategies delivered positive returns, including HDFC Defence Fund, which rose 3.45%.

Fewer NFOs Add to Pressure

The slowdown in new fund offers (NFOs) in the thematic space is a structural reason for weaker flows. Anand Rathi's Head of Mutual Funds, Shweta Rajani, noted that the pace of launches has reduced significantly, directly impacting incremental flows.

Expert Insights

Experts suggest a balanced approach to the segment. Pravin Kulkarni, founder of UPInvest, advised that exposure to sectoral and thematic funds should ideally be capped at around 10% of portfolios. Rajani added that sectoral and thematic funds "tend to undergo cyclical performance and increase concentration risk," suggesting investors consider diversified equity categories that offer broader exposure across sectors and market capitalisations to better navigate market cycles.