Why are sectoral and thematic mutual funds falling out of favour in 2025?

Surbhi Khanna, ET Online

Jun 28, 2025

Out of favour

Equity mutual fund schemes that bet on sector and focused themes - the hot picks of 2024 - are falling out of investor favour amid erratic returns and heightened risk, as reported by ET Bureau.

Drop in inflows

Net inflows into these funds, which averaged Rs 15,340 crore a month from June to December 2024, have dropped to an average of Rs 1,408 crore for the three months from March to May 2025.

Liquidation

"Several investors who have mis-sold these funds, and did not understand the risks, now seem to be liquidating them," says Vicky Mehta, an independent mutual fund analyst.

NFOs helped

"A lot of money in sectoral and thematic funds was raised through NFOs from large fund houses, which were lapped up by investors due to unique propositions," says Dheeraj Gaur, CEO, Arete Capital.

Alternatives

Mutual funds raised record money from retail investors through NFOs in segments like defence, tourism, capital markets, energy, manufacturing, innovation, transportation and logistics, automotive, internet economy, realty and many others.

Avoiding fresh allocations

Mehta believes informed investors who understand when to get in and out of sector funds should consider such funds, while retail investors are better off staying away and avoiding fresh allocations.

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