The mutual fund industry witnessed an exceptional year in 2024, with total inflows into equity mutual funds exceeding Rs 3.5 lakh crore, and assets under management (AUM) growing by nearly 40%.

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In 2024, the standout performers were sectoral and thematic funds, which attracted over Rs 1.4 lakh crore in inflows and saw the launch of 45 new funds. These funds, focused on specific industries or themes such as green energy and manufacturing, often garner significant investor attention during bullish markets.

However, experts advise caution. “Investors won’t be worse off if they ignore sectoral or thematic funds,” says Dhirendra Kumar, CEO of Value Research, in a conversation with Business Today. “The mutual fund industry often markets these products like consumer goods, based on compelling stories. Unfortunately, over 20-30 years, investors fail to learn from past mistakes. This isn’t the first time—it happened during the technology and infrastructure booms as well.”

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Sectoral and thematic funds are highly cyclical. They offer exciting opportunities during bull runs, but their unpredictable performance makes them unsuitable for investors seeking stability.

Vivek Sharma, Investment Head at Estee Advisors highlights how utility funds, which delivered exceptional returns of 67% and 43% in 2021 and 2022, respectively, ended up as the worst performers in 2023, with returns plunging to -19%. Conversely, underperforming sectors like consumer discretionary bounced back as the second-best performers in 2023. While these funds can yield impressive gains during certain periods, their cyclical nature makes it difficult to predict future winners.

Where should you invest in 2025?

Experts unanimously suggest sticking to timeless, diversified categories like multicap and flexicap funds while avoiding the lure of thematic funds.

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“Go for funds with long-term potential, such as multicap funds, or build a portfolio with one or two index funds, supplemented by small-cap and mid-cap funds. The only way to enjoy consistent returns is by maintaining reasonable expectations,” advises Kumar.

Flexicap and multicap funds are particularly well-suited for 2025. Their sector-agnostic approach and ability to invest across market caps ensure consistent performance, making them a dependable choice for investors, according to Sharma.

Hybrid funds, which balance equity and debt, are also gaining traction amid market volatility. “These funds offer stability, making them an excellent option for investors seeking balanced portfolios,” Sharma explains. Multi-asset funds, which include equities, bonds, and gold, gained popularity in 2024 and are expected to maintain their relevance in 2025.

For those looking at the bigger picture, India remains an attractive investment destination. “With a young, ambitious population, rising disposable incomes, and growing financial literacy, Indian markets are perfectly positioned for sustained growth,” concludes Sharma.