Why Thematic Mutual Funds stopped performing: what happened, what survives, what to avoid
- Kiran S N
- Aug 1
- 3 min read
A 98% Plunge in investor interest The scale of the decline in thematic fund inflows is truly breathtaking. From the peak of ₹22,351 crore in June 2024, the decline has been even more severe when we look at the recent monthly data from AMFI. The inflows hit a crescendo of ₹15,332 crore in December 2024, only to crash to a mere ₹476 crore by June 2025
After the December 2024 peak, January saw a 41% month-on-month decline to ₹9,017 crore, followed by another 37% drop in February to ₹5,712 crore. The most dramatic single-month decline came in March 2025, when inflows plummeted by a shocking 97% to just ₹170 crore. While there was a brief recovery in April and May, June's decline to ₹476 crore confirmed that the retreat was far from over.
What We Noticed in the HDFC Defence Fund
Recently, when the team here at Square League was going through HDFC Defence Fund’s latest factsheet, something stood out. Just a year ago, this fund was the poster child of thematic success posting nearly 129% 1-year returns! But alongside that was a beta close to 4 and a standard deviation of ~20%. In short: high reward, yes...but seriously high risk.
Now? The story’s changed.
As of July 2025, returns have cooled dramatically now standing at -0.6%. What’s more telling is the volatility spike, standard deviation now stands at close to ~30%, and the Sharpe ratio has slid into neutral. It’s no longer a high-return rocket it’s become a rough ride.
Now, let’s be clear we’re not here to crucify thematic funds. The goal isn’t to dismiss them, but to help investors separate hype from substance. Take pharma, for example. Unlike defence, which surged and then stumbled, some healthcare-focused funds have delivered consistently strong returns without wild volatility.
Funds like ICICI Pru P.H.D, SBI Healthcare Opportunities, and DSP Healthcare have all shown impressive 1 and 3 year CAGRs, coupled with lower beta, solid Sharpe ratios, and better downside capture.
The message? When the sector has structural strength and the fund is managed with discipline, thematic investing can work across cycles. It just needs a more informed, risk-aware.
Don't Invest based on past returns, it will burn!!
The Cause?
Market Volatility and Global Uncertainties: The period from late 2024 to 2025 has been marked by heightened global trade tensions, particularly concerning US tariff policies and their impact on various sectors. This uncertainty has made investors increasingly wary of concentrated sector bets, which are the hallmark of thematic investing.
Performance Reality Check: While thematic funds delivered spectacular returns during the 2022-2024 bull run, recent performance has been sobering. Most thematic categories have struggled to deliver double-digit returns, with only a handful managing to stay in positive territory for 2025. This performance gap has clearly dampened investor enthusiasm.
Shift in Risk Appetite: There's been a notable behavioral shift among investors toward more diversified, balanced approaches. The data shows increased inflows into flexi-cap funds, which received ₹5,733 crore in June 2025, maintaining their position as the top equity category for four consecutive months. This suggests investors are seeking the growth potential of equities while avoiding the concentration risk of thematic strategies.
The Broader Market Context
The decline in thematic fund inflows must be viewed against the broader market dynamics. Interestingly, while thematic funds have struggled, overall equity inflows have remained strong, with June 2025 seeing ₹23,587 crore in equity inflows. This suggests that the issue isn't with equity investing per se, but specifically with concentrated, thematic approaches.
Domestic Institutional Investors (DIIs) have continued to provide strong support to markets, with consistent buying momentum throughout 2025. However, their preferences have clearly shifted toward more diversified strategies, as evidenced by the continued strength in flexi-cap and multi-cap fund categories.
NFO Fatigue and Market Saturation
Another factor contributing to the decline is what can be termed "NFO fatigue." The year 2024 saw an unprecedented 40 new fund offers in sectoral and thematic categories, raising ₹67,772 crore. This flood of new products may have led to market saturation and investor confusion, diluting flows across too many similar strategies.
Road Ahead
Inflows into thematic funds have nosedived. This isn’t just a market mood swing it’s a shift in mindset.
The euphoria of 2023-24 has faded. Investors are now asking tougher questions, and that’s a good thing. Thematic funds were never meant to be core holdings. They’re cyclical, volatile, and demand long-term conviction.
What survives this reset? Funds with real processes, not just catchy themes.
For investors, this correction might be an opportunity, valuations are more reasonable, and hype is out of the way.
The industry, too, needs to grow up. Less marketing, more education. Thematic investing isn’t dead it’s just maturing. And that’s a healthier path forward.
Disclaimer: This content is for educational purposes only; please conduct your own research and consult with a qualified investment advisor before making any investment decisions.
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