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Market expert, Pallav Agarwal, Certified Financial Planner at Bhava Services LLP, told ETMutualFunds that the trend reflects a clear preference for diversified strategies over concentrated thematic exposure.
“Overall equity fund inflows fell 40% month-on-month in May 2026, and sectoral and thematic funds saw one of the sharpest declines at 66.8%. At the same time, large-cap, mid-cap and small-cap funds continued to attract relatively better inflows, confirming a clear preference towards diversified categories over concentrated sector bets,” Agarwal said.
Another expert, Manish Kothari, Co-Founder & CEO, ZFunds had a similar view and shared with ETMutualFunds that the slowdown in flows reflects a natural shift in investor preference towards broader and more diversified strategies during periods of heightened market uncertainty and sectoral and thematic investing inherently requires getting both the theme and the timing right, and recent market conditions have highlighted how difficult that can be.
Kothari further said that the difference in sector performance has been exceptionally wide; for instance, BSE Power is up approximately 25-30% while Nifty IT is down over 25%, a differential of around 50 percentage points in under six months so in such an environment, getting the sector call wrong can hurt returns significantly.
Profit booking or weakening conviction?
In May, the sectoral and thematic funds received an inflow of Rs 647 crore compared to an inflow of Rs 1,949 crore in the previous month. On a yearly basis, the inflows in sectoral and thematic funds declined by 68% from Rs 2,052 crore in May 2025.
A key question emerging from the latest flow data is whether investors are booking profits after strong gains in several thematic segments or whether confidence in thematic investing has weakened.
The data from AMFI showed that in May, the gross inflows in sectoral and thematic funds were recorded at Rs 8,629crore whereas the repurchase or redemption stood at Rs 7,981 crore.
Commenting on this, Kothari said that the data does not point to large-scale profit booking. Instead, it reflects softer investor conviction. Thematic fund launches have slowed, many recent investors have seen modest returns, and better opportunities in mid- and small-cap funds are drawing incremental allocations.
Agarwal said that the absence of large redemptions suggests this isn’t aggressive profit-booking, rather, this reflects lack of conviction in sectoral/thematic funds. In addition to this, there was no support from any sectoral NFO launch in May to pull in fresh money as was the case in April.
In May no new sectoral and thematic fund was launched, the data from Association of Mutual Funds in India (AMFI) showed.
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Which sectors and themes continue to offer long-term opportunities?
In May, sectoral and thematic funds delivered upto 21% return and gave an average return of 2.05% with international funds leading the return chart. Mirae Asset Global X Artificial Intelligence & Technology ETF FoF offered the highest return of 20.57% in May, followed by Edelweiss US Technology Equity FOF which gave 16.02% return.
Quant Teck Fund, a tech sector based fund, delivered a return of 11.15%. HDFC Defence Fund, the only actively managed fund based on the defence sector, delivered a return of 4.49%. HSBC Brazil Fund lost the most of around 8.93% in May.
Despite the slowdown in flows, several sectors continue to benefit from structural growth trends and could remain attractive for long-term investors? According to Agarwal, investors should focus on themes backed by durable earnings growth rather than short-term market narratives.
“Themes focused on domestic structural stories like capital expenditure, defence indigenisation, healthcare, and consumption still look attractive for the long term. Their underlying earnings cycles are sustainable and not dependent on sentiment-driven flows to justify valuations,” he said.
Kothari said the challenge with sectoral and thematic investing is that success depends not only on identifying a promising theme but also on entering and exiting at the right point in the cycle and by nature, these strategies are tactical and cyclical rather than structural long-term portfolio allocations.
He further said that for most long-term investors, a more effective approach is to invest through diversified equity funds where the fund manager has the flexibility to identify emerging opportunities across sectors and adjust allocations as market conditions evolve and this allows investors to participate in long-term growth opportunities without having to make concentrated sectoral calls themselves.
Suitable for new investors and allocation?
With sectoral and thematic fund inflows dropping sharply and overall equity inflows touching their lowest level of 2026 so far at Rs 22,907 crore in May, investors may wonder whether this is the right time to consider thematic exposure?
Kothari said the thematic is for relatively experienced investors who understand the risks associated with concentrated exposures and any allocation should be determined by the investor’s overall risk appetite, investment experience, portfolio objectives, and with the guidance of a distributor for long-term gains.
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He further said that for most investors, the core of the portfolio should continue to be built around diversified equity strategies, with thematic exposure playing only a supporting role.
Agarwal said that yes new investors can take exposure but very selectively, with overall equity inflows at their lowest level in 2026 so far at Rs 22,907 crore in May, this is a better entry environment than peak-flow periods, and a 10–15% allocation in a theme with genuine earnings visibility is reasonable, with the core portfolio in flexicap or largecap funds.
The assets under management (AUM) of sectoral and thematic funds was recorded at Rs 5.35 lakh crore in May witnessing an increase of 1% from Rs 5.30 lakh crore in April.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
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