Among the equity asset classes, sectoral/thematic funds recorded the highest inflows in September 2023, amounting to Rs 3,146.8 crore. This surge follows a trend from August 2023, when theme-based funds secured the top position in terms of flows, amassing Rs 4,805.81 crore, buoyed by the launch of five new thematic funds.

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The scenario is interesting as thematic funds, while enticing, are not for the faint-hearted. They are generally considered high-risk due to their concentration on a particular sector or theme. However, the surge in inflows indicates a growing appetite among investors for higher risk and potentially higher reward investments.

Understanding thematic funds

Thematic funds are designed around specific themes or trends, such as clean energy, technology, or healthcare. The core objective of thematic funds is to invest in companies related to the chosen theme, with the aim of capitalising on growth opportunities and generating robust returns for investors.

The rising inflows

Melvyn Santarita, Analyst, Manager Research, Morningstar Investment Adviser India, attributed the spike in the flows in September to the fact that there were four new fund launches in this category, which cumulatively garnered Rs 1,629 crore.

A look at returns of thematic funds

It is generally advised to invest in thematic funds with a long-term approach. In view of that, let's take a look at 5- and 10-year returns of some of the thematic funds:

(Source: Moneycontrol)

Investment strategy

Chintan Haria, Head of Investment Strategy at ICICI Prudential AMC, cautioned that investors should remain patient and committed for at least five years when venturing into thematic investments, considering the potential for sporadic volatility due to various factors such as geopolitical issues and global central bank activities.

The question that inevitably arises is how investors can make the most of the current rally in sectoral and thematic funds. Haria suggests that sectors like banking, IT, infrastructure, and healthcare hold promise from a medium- to long-term perspective. He advocates investing in banking-based index funds or ETFs for those with a five-year horizon.

"Identifying structural stories in the market is key to making well-informed investments in sectoral or thematic offerings," he told CNBC-TV18.com.

One key strategy for sectoral investments, especially in volatile markets, is the use of Systematic Investment Plans (SIP). According to Haria, SIPs ensure that investors maintain discipline by spreading their investments across various market phases, ultimately benefiting from a complete market cycle. Even during down cycles in specific sectors, continuing with SIPs can lead to substantial gains.

Diversification and risk mitigation

Sectoral and thematic investing carries specific risks, primarily associated with portfolio concentration and sharp market volatility. To mitigate these risks, Haria suggests investors carefully assess if any negative developments in a sector are fundamentally rooted and make investment decisions accordingly.

"Optimal allocation of sectoral and thematic funds involves integrating them into a satellite portfolio. This approach safeguards the overall portfolio from potential adverse developments in specific sectors. The allocation percentage should be established with the guidance of a financial advisor, considering the investor's risk tolerance and financial goals," he said.

(Edited by : Shoma Bhattacharjee)