How new thematic mutual fund categories fared

Moving beyond traditional thematic categories such as infrastructure, consumption, and MNCs, mutual fund houses have recently introduced newer thematic funds proxying the business cycle, innovation, and manufacturing themes.

Here, we look at how these three thematic categories have performed and the sectors they have bet on to deliver this performance.

Business cycle funds

Business cycle funds dynamically change their sector allocations based on prevailing economic conditions. Unlike traditional equity funds that maintain consistent sector allocations, these funds actively shift their portfolio to capitalise on different phases of the economic cycle — recession, recovery, expansion, and slowdown. They look to generate superior returns by increasing exposure to sectors expected to outperform in the anticipated economic environment.

Currently, 19 funds exist in this category, with 12 funds having less than two years of NAV history. Performance over the last year shows significant variation; the top-performing fund, Kotak Business Cycle, delivered 12 per cent returns, while the bottom performer, Quant Business Cycle, delivered a negative five per cent. Overall, the category delivered 1 per cent returns while the Nifty 500 total return index achieved 7 per cent during this period. Therefore, it is clear that not all business cycle funds were good at reading the economic cycle.

According to the latest portfolio data, the top-performing fund over the past year, Kotak Business Cycle had its highest exposure in banks (14 per cent of total assets), followed by industrial products (6 per cent) and retailing (5.8 per cent). The second-best performer, ICICI Prudential Business Cycle, allocated 23 per cent to banks, 9 per cent to automobiles, and 7 per cent to construction projects.

The expense ratio for regular plans ranges between 1 per cent and 2.4 per cent, while for direct plans, it falls between 0.3 per cent and 1.2 per cent.

Innovation funds

Innovation-themed mutual funds focus primarily on companies playing on technological advancements and disruptive business models that could reshape industries. Unlike traditional equity funds, they target high-growth sectors rather than established businesses.

Eight of the 10 funds in this category were launched less than two years ago. For the last year, the top-performing fund was Bandhan Innovation, delivering 16 per cent returns, while the bottom-performing UTI Innovation yielded a negative one per cent. The category generated an average return of seven per cent.

Analysing the top sectoral allocations of the best-performing funds in the category, Bandhan Innovation had major exposures to Pharmaceuticals (12 per cent), Finance (8 per cent), and Retailing (8 per cent), while ICICI Prudential Innovation invested primarily in Banks (11 per cent), Automobiles (9 per cent), and Pharmaceuticals (9 per cent).

Regular plans have an expense ratio ranging from 1.5 per cent to 2.8 per cent, whereas for direct plans, it ranges between 0.5 per cent and 1.3 per cent.

Manufacturing funds

Manufacturing theme funds concentrate on companies positioned to benefit from India’s rise in manufacturing. These funds select stocks by identifying sectors aligned with government initiatives like Production-Linked Incentive schemes, Make in India, and Atmanirbhar Bharat. Fund managers prioritise companies with strong order books, operational efficiency, export potential, and healthy balance sheets.

Eleven out of 17 funds in this category were launched in the last two years. Axis India Manufacturing topped the performance chart with 6 per cent returns over the last year, while Quant Manufacturing delivered negative returns of 6 per cent. The category delivered an average return of 3 per cent.

Axis India Manufacturing, the top performer in the category, allocated significant amounts to Pharmaceuticals (18 per cent), Automobiles (14 per cent), and Petroleum Products (8 per cent). The second-best performer, Canara Robeco Manufacturing, invested primarily in Automobiles (12 per cent), Electrical Equipment (11 per cent), and Consumer Durables (7 per cent).

Active fund regular plans have an expense ratio between 1 per cent and 2.3 per cent, while direct plans range from 0.5 per cent to 1 per cent.

The above analysis shows that thematic funds often do not outperform broad market indices such as the Nifty 500 TRI on average. Though the top funds in each theme may do so, identifying such funds in advance at the time of their launch is close to impossible. This argues for looking at a thematic fund’s track record before investing in it.

Published on May 3, 2025

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