Hype Vs Return: 95% of thematic funds underperform Nifty 50 even as NFO launches surge

On a 1-year basis, according to Ace Equity data, out of 78 thematic funds (unique schemes and data available for 1-year), 94.87% (74 out of 78) underperformed the Nifty 50.

Despite a continued surge in new thematic mutual fund offerings - from defence to tourism and EVs - data shows a mismatch between investor expectations and performance.

On a one-year basis, according to Ace Equity data, of 78 thematic funds (unique schemes and data available for one year), 94.87% or 74 out of 78 underperformed the Nifty 50, 87.18% (68 out of 78) lagged behind the BSE 200, and 47.44% (37 out of 78) failed to beat their own benchmarks over the past year. Despite the not-so-impressive performance, the funds continue to be in demand among investors.

Out of the 78 funds, in terms of performance, the weakest returns were reported by Samco Special Opportunities Fund-Reg(G) with returns of -17.07% against the Nifty 500 TRI benchmark of 5.04%, followed by Quant PSU Fund- Regular (G) with returns of around -10.02% against the Nifty PSE-TRI index of -4.68%.  The HDFC MNC Fund - Regular (G) posted a -9.75% return, underperforming its benchmark Nifty MNC - TRI, which declined 4.28%. The Quant Quantamental Fund - Regular (G) delivered a return of -7.53%, underperforming its benchmark NIFTY 200 - TRI, which returned 5.58%. The Quant Manufacturing Fund - Regular (G) recorded a one-year return of -9.60%, lagging behind the Nifty India Manufacturing - TRI, which fell 1.06%.

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The capital market regulator too has flagged off concerns. In February 2025, the then Sebi Chairperson Madhabi Puri Buch said the regulator was studying the issue and would address it structurally, not just symptomatically. A consultation paper or draft circular on rationalising thematic fund launches is expected soon, according to regulatory sources. Moneycontrol has reached out to Sebi for a confirmation on this.

Sebi’s Executive Director Manoj Kumar too said recently that the regulator is actively reviewing scheme categorisation norms.

At the Moneycontrol Mutual Fund Summit on June 22, Navneet Munot, MD & CEO of HDFC AMC and Chairman of the Association of Mutual Funds in India AMFI credited Sebi for implementing guardrails such as mandating 80% exposure to the theme and tight benchmark alignment, while adding that for fund houses, “Innovation has its place, but not at the cost of investor welfare.”

Top fund house leaders agreed on a need for a more measured and responsible approach to launching thematic New Fund Offers (NFOs). During the month of May, around 19 new funds were launched, collecting around Rs 4,170 crore. Of this, around 43 percent was through thematic/sectoral funds. Thematic funds attracted Rs 2,052 crore in May 2025 alone, signalling sustained investor interest even as performance falters.

On frequent NFO launches, Munot said, “We used to say the four most dangerous words in investing are ‘this time is different.’ In our industry, the five most dangerous are, ‘everyone else is doing it.’ That’s no reason to launch a fund,” he said, adding that each offering should be backed by strong conviction and aligned with investor needs.

Radhika Gupta, MD & CEO of Edelweiss AMC, added that there is a need to move beyond discussions on product proliferation. “We’ve built all the Lego pieces. Now we need to show (investors) how to build with them,” she said, pointing out that funds based on narrow ideas like tourism or EVs should serve as satellite holdings, not core allocations, and investors need to be made aware of this.

Kalpen Parekh, MD & CEO of DSP Mutual Fund, echoed the sentiment. “We’ve moved from few funds to plenty, and it’s time to bring in more balance and responsibility,” he said. While he admitted that they would like to follow a few-funds model, he acknowledged the growing appetite of investors. Hence DSP, he explained, follows a simple rule: “Would we invest our own money in this?” If not, the fund doesn’t get launched.

The money managers added that while it is understood that some themes can outperform cyclically, fund managers must also educate investors on how to approach these high-risk categories. “At one point, our natural resources fund was doing 40% CAGR. We had to stop taking inflows and issued strong disclaimers,” said Parekh.

A similar case was seen with regards to HDFC AMC’s Defence Fund (AUM of Rs 6,674 crore), which launched when euphoria in the defence sector was at its peak. The fund, despite strong returns and investor demand, has been closed to fresh SIPs and lump sums for over a year due to high valuations. Munot noted that while funds are launched based on market trends, ultimately an AMC is responsible for investor protection. The HDFC Defence Fund is considered to be a highly concentrated fund, with 21 stocks. The top five stocks constitute 63 percent of the fund’s portfolio. At the time of launch on June 2, 2023, the Nifty Defence was up 4% month-on-month in May 2023. In June 2024, when SIPs and lumpsums were discontinued, the index was up around 12%. Since then, the sector has seen corrections. As of date for June 2025, the index returns are around -0.05% after 21.84% in May 2025.

On the continued flows into thematic and sectoral funds, Vikas Gupta of Omniscience Capital recently told Moneycontrol that investors should be cautious while allocating and be conscious of valuations in the popular sectors. "If they pay attention to the P/E ratios of the funds they are allocating to, it will help rational capital allocation and lower chances of sectoral or thematic bubbles," he said.

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