In 2021, AMCs launched a wave of thematic funds around technology, digital innovation, and consumption. By 2022, most of these funds were sitting on negative or single-digit returns. In 2023-24, infrastructure, defence, and manufacturing thematic funds dominated NFO launches. The pattern is not coincidence - it is how the fund distribution business works.
How AMCs Decide When to Launch
AMCs do not launch thematic funds when they believe the theme is undervalued. They launch when they believe the theme will attract investor money. These are different things. Investors are attracted to recent performance. A sector that has doubled in two years gets covered in financial media, generates social media buzz, and fills distributors’ inboxes with inquiries. That is when an AMC files an NFO with SEBI.
The SEBI filing-to-launch timeline typically takes 3-6 months. By the time a thematic fund raises money and deploys it, the underlying theme is often already priced for perfection.
The Data on NFO Timing
Look at the infrastructure theme as a case study. Infrastructure stocks underperformed between 2011 and 2016. There were virtually no new infrastructure fund NFOs in this period. Between 2021 and 2024, infrastructure/capex/manufacturing themes saw a significant rally, and AMCs launched multiple NFOs in this space.
Similarly, ESG funds saw a burst of NFO launches in 2021-22, right after the global ESG investing narrative peaked. Most ESG NFOs from that period have delivered flat or negative alpha versus the plain Nifty 500.
| Year | Major Thematic NFO Wave | Theme Returns 2 Years After |
|---|---|---|
| 2007-08 | Infrastructure, Real Estate | Severe underperformance |
| 2014-15 | Banking/BFSI funds | Mixed; banking underperformed 2015-18 |
| 2020-21 | Technology, Digital, Innovation | Sharp underperformance in 2022 |
| 2021-22 | ESG funds | Flat to negative alpha vs Nifty 500 |
| 2022-24 | Defence, Capex, Manufacturing | Too recent to assess |
Why Investors Bite
Three behavioural factors explain why investors subscribe to these NFOs:
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Recency bias: A theme that returned 50% in the last 2 years feels like it will return 50% in the next 2 years. It usually does not.
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Story appeal: Infrastructure or defence is a concrete story. It is easier to believe in a capex cycle narrative than to hold a boring diversified fund that owns banks and FMCG.
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Fear of missing out: When distributors and media cover a booming sector, investors feel they are late if they do not buy in immediately.
The NFO Pricing Illusion
A common misconception is that NFO price of Rs 10 is cheap. The Rs 10 NAV is not a price - it is an arbitrary starting point. A fund at Rs 10 NAV is not cheaper than a fund at Rs 500 NAV. What matters is what the fund buys with the money it collects. If it buys overvalued sector stocks, the Rs 10 NAV fund will deliver poor returns regardless of the starting price.
Actual Performance of Thematic vs Diversified Funds
A 2023 analysis of funds over 5-year periods showed that diversified flexi cap and large cap funds beat their sector-specific counterparts in roughly 70% of rolling 5-year windows. Sector funds, when they win, win bigger - but the average outcome is underperformance relative to diversified alternatives.
| Category | 5-Year CAGR Range (approx) | Beat Nifty 50? |
|---|---|---|
| Diversified Flexi Cap | 16-24% | Frequently |
| Pharma Sector | 10-22% (high variance) | Inconsistently |
| Technology Sector | 12-25% (high variance) | Inconsistently |
| Infrastructure Sector | 8-20% (high variance) | Inconsistently |
When Thematic Funds Can Make Sense
There is a legitimate use case for thematic funds if you have a structural view that differs from the market and a 7+ year horizon. If you genuinely believe India’s defence indigenisation is a multi-decade theme and you are willing to hold through a 3-year drawdown, a defence fund is a reasonable concentrated bet.
The problem is most investors who buy thematic funds are not making a contrarian multi-decade bet. They are chasing recent performance with a 1-2 year horizon.
The Distributor Incentive Structure
Thematic fund NFOs typically offer higher upfront commissions to distributors than existing diversified funds. This creates a direct financial incentive for distributors to push thematic NFOs over existing, lower-cost index funds or established active funds. The investor pays this in the form of higher TERs and, eventually, underperformance.
What to Do Instead
If you are interested in a theme, the honest approach is:
- Buy into the theme when it is unloved, not after a 2-year bull run
- Use existing diversified funds that have natural exposure (Nifty 500 already has meaningful infrastructure, manufacturing, and IT weight)
- If you want pure sector bets, use ETFs rather than actively managed thematic funds - the TER is typically lower
Bottom Line
AMCs launch thematic funds at peak sentiment because that is when they can raise the most money, not because the underlying theme is undervalued. The NFO Rs 10 price is not a bargain - it is an arbitrary accounting convention. The historical record shows that most thematic fund investors buy high, watch the theme mean-revert, and either sell at a loss or hold indefinitely waiting to break even. If a theme has been in financial media headlines for 12 months, the money to be made has likely already been made by those who bought earlier. A diversified Nifty 500 index fund is boring precisely because it does not tell you a story - and for most investors, boring is the right choice.
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