'Meal on plate too dominated by...': Edelweiss MF's Radhika Gupta on why jumping into a theme at peak is a bad idea

Thematic funds have seen a dramatic rise recently. Sectoral and thematic mutual funds attracted the highest inflows of ₹46,137 crore in FY24, according to AMFI's data. Following this trend, in August 2024 alone, thematic funds recorded a net inflow of ₹18,117 crore, which made up 47% of total net inflows into equity schemes. There are now 179 thematic funds compared to a total of 464 funds, surpassing the combined total of categories like small-cap, mid-cap, large-cap, and flexi-cap funds.

Radhika Gupta, MD and CEO of Edelweiss Asset Management, emphasized the need to avoid narrow and expensive themes. Broader themes like financials or consumer sectors offer better long-term stability. "A very narrow theme is like eating pickle, chutney, and dessert for your main course. I think the meal on the plate has become too dominated by pickle, chutney, and dessert."

Gupta also cautioned investors against jumping into a theme at its peak. She pointed to PSU (Public Sector Undertaking) funds as a prime example. "A year ago, PSU funds had lackluster 10-year returns in single digits. However, after a recent surge, these funds delivered 100% returns in just one year, making their 10-year returns look significantly better at 18%. While it's hard to perfectly time the bottom of the cycle, aiming for a mid-cycle entry can be a smarter move," she advised.

She further elaborated on a growing trend among investors, driven by the rise of fintech platforms, where individuals tend to prioritize highly-rated funds without fully assessing the risks. "We’ve created a generation of 'sorters.' These are the same people who buy infrastructure and PSU funds only after they’ve surged 100%. When these funds drop to a lower rank, they become disappointed. This reactive behavior can be dangerous," Gupta remarked.

Edelweiss, which manages ₹60,000 crore in equity assets, doesn’t make headlines for extreme performance, Gupta said. "We don’t chase five-star ratings because they often come with elevated risks. Most of our funds are rated four stars, and we prefer that—consistent growth over extreme highs and lows," she explained. This approach has allowed Edelweiss to maintain net positive inflows every month for the past seven years, a testament to their steady performance.

"While other fund houses have faced market volatility, our focus on consistency has paid off. Our products are built on this foundation," Gupta concluded, urging investors to prioritize long-term stability over short-term gains.