WHEN I'M ASKED in interviews on how to identify areas of excesses or froth in the market, I half flippantly say that the easiest way to do this is to look at areas or themes where thematic new fund offerings (NFOs) are being launched.

In the last 18 months, some of the popular themes for NFO launches have been defence, PSUs, industrials, small-cap, etc. Most of these haven't performed well since their launch, and this is not an aberration.

Data studied by First Global shows that thematic funds almost always tend to be launched near the peak of that theme. Even going back over the years, many technology funds, for example, were launched just before the 2000 stock market crash!

More recently, in 2021, many Nasdaq or China/Greater China funds were launched. All of them crashed in the following year, with the Nasdaq almost becoming the worst performing global index for 2022.

This is a theme (pun intended) you would see playing out every time NFOs come around a particular category, whether that category is a geography, a sector, or size (small-cap vs large-cap). Usually, investors lose money or underperform on such investments.

The truth is that fund houses also know that risks are high and super-normal returns are unlikely in these themes.

But they also understand that this is when lay investors have come to know about that theme. Most have some FOMO (fear of missing out) and, hence, when the scheme is launched, they participate enthusiastically. That may not end well for the investor but bring good tidings to the asset management company, which is able to gather assets and earn fees on the new schemes. All these play on the trend-following instincts of human beings. And this plays out not just in the markets, but everywhere.