Mutual Funds: Why have fund houses launched too many sectoral schemes lately? MintGenie explains

If you are a lay investor and plan to invest in a new mutual fund scheme, you undoubtedly have several options. However, most options are likely to fall into thematic or sectoral schemes.

In August alone, four asset management companies (AMCs) rolled out thematic mutual fund schemes, including the Bank of India Business Cycle Fund, a manufacturing mutual fund by Invesco India and a business cycle fund by Motilal Oswal.

The latest AMFI (Association of Mutual Funds in India) data released on Tuesday revealed that there are 179 thematic mutual funds in the entire mutual fund universe, which is—hold your breath—more than the total of all key categories put together, i.e., small cap, mid cap, large cap, flexi cap, and multi-cap mutual funds.

Several mutual fund houses have recently launched several sectoral/thematic mutual fund schemes. These include the SBI Innovative Opportunities Fund and the ICICI Prudential Energy Opportunities Fund.

(Source: AMFI)

Sectoral funds galore

But why are mutual fund houses launching sectoral schemes aplenty?

Some wealth advisors believe that asset management companies (AMCs) use them as a tool to garner more money from investors along different themes. But can’t they also do this by launching schemes in other categories?

While shedding light on this, Sridharan Sundaram, founder of Wealth Ladder Direct, says that since Sebi introduced the fund categorisation of mutual fund schemes in 2017, fund houses are not left with too much leeway in other categories.

This means that the definition of a scheme as small cap, flexi cap, mid-cap, or multi-cap is well-defined. One fund house can launch only one scheme in each category, leaving fund houses with little legroom for launching schemes in the existing categories.

“These fund houses tend to launch new schemes to garner more funds. Even investors also want new themes and categories to invest their money, which prompts these AMCs to roll out new schemes in sectoral funds,” says Sundaram.

“Another reason for launching new sectoral funds is that schemes can’t do sectoral rotation because each constituent stock may have an investment of around ₹300-400 crore, so it is difficult to exit these investments,” he elucidates.

Echoing similar sentiments, Preeti Zende, a Sebi-registered investment advisor and founder of Apna Dhan Financial Services, says, “Sectoral or thematic funds are favourite among investors for quite some time as some specific themes are in the news due to special emphasis given by the Centre. These include defence, infrastructure, railways, shipping, EV and manufacturing. So, many companies from these sectors get more cash flow, and their valuations are now skyrocketing. To garner the investors' interest and to be part of this euphoria, many AMCs prefer to launch such sectorial and thematic funds to attract more and more investment.” 

"But investors should be very careful since these sectors are already overheated, and a bubble is already created in some parts. So instead of betting on any sector or theme, investing in diversified equity mutual funds and managing your risk is better," she adds.

“The Indian growth rate and other initiatives of the Government such as Make in India, defence sector spends and so on have given strong impetus to some key sectors such as manufacturing, defence, exports and so on. Companies in these sectors have projected good outlook for growth over the 5 to 10 years. There is an opportunity which needs to be capitalised by investing in these sectors. A sectoral fund can explore complete potential of these sectors. The investors also get a good option of participating in these sectors. Therefore, we have seen an uptick in sectoral fund launches,” says Nitin Rao, Head Products & Proposition, Epsilon Money Mart.