Fund Slop: The Rise of “Quantity Over Quality” in Mutual Funds

Thanks to the explosion of generative AI, the internet is increasingly clogged with “AI slop”—mass-produced, low-quality content optimized for clicks rather than insight. Finding genuine insight amidst the noise has become harder than ever.

A strikingly similar phenomenon is unfolding in the Indian mutual fund industry. Call it “Fund Slop”: a flood of new, often exotic fund launches designed less to deliver long-term investor value and more to gather Assets Under Management (AUM) and maximize distributor commissions. Just as AI slop prioritizes quantity, Fund Slop prioritizes constant product launches.

How Regulation Accidentally Encouraged Fund Slop

In 2017, SEBI capped AMCs to one fund per category in diversified equity (Large Cap, Flexi Cap, etc.). This was unquestionably good for investors—but it also capped growth for AMCs.

To bypass this constraint, AMCs shifted focus to categories with no such limits:

• Thematic / sectoral funds

• Passive funds, especially complex factor and smart-beta strategies

New Fund Offers (NFOs) are particularly attractive: they generate higher visibility, higher distributor commissions, and easier AUM gathering.

The NFO Machine: By the Numbers

The result is an industrial-scale NFO pipeline:

• 222 NFOs launched in 2025 (till November), raising over ₹63,600 crore

• Thematic dominance: Of ~70 equity NFOs in FY25, 52 were sectoral or thematic

• These thematic NFOs raised ₹73,633 crore — nearly 3x the previous year

AUM Explosion

• Sectoral/thematic AUM rose from ₹2.58 lakh crore (Dec 2023)

• to ₹4.61 lakh crore (Nov 2024) — a 79% jump in just 11 months

• and crossed ₹5.13 lakh crore by Sept 2025, a 223% rise in three years

This is not organic investor demand — it’s manufacturing.

How Fund Slop Is Engineered and Sold

The most insidious feature of Fund Slop is how it’s marketed.

1. The Hindsight Index

AMCs often collaborate with index providers to create custom indices after a theme has already rallied (defence, tourism, manufacturing). Index rules are written with full knowledge of past winners.

2. The Backtest Illusion

Marketing material then showcases dazzling 5–10 year “backtested” returns. These simulations ignore:

• Transaction costs

• Survivorship bias

• Liquidity constraints

• The difficulty of deploying large capital into already-hot themes

This isn’t fund management — it’s historical storytelling.

3. The Post-NFO Performance

Once the fund launches, reality intrudes:

• In 2025, only 22% of sectoral funds beat the Nifty 50

• Of thematic schemes older than a year, 58% delivered negative returns over the past 12 months

• Several high-profile conglomerate funds, launched with much fanfare, struggled soon after their NFO periods

Investors are often buying after the easy money has already been made.

Passive Slop: Complexity Disguised as Discipline

The same incentives are now playing out in passive investing.

In 2025 alone, 72 index funds were launched. While some add value, many are:

• Narrow

• Over-engineered

• Built around backtested factor combinations

These products introduce complexity and higher costs, while marketing themselves as “rules-based” and “scientific.” In practice, much of this factor alpha disappears in live markets—turning passive investing into another form of slop.

Same disease. Different packaging.

SEBI Pushes Back

To its credit, SEBI has begun addressing the excesses:

• 50% overlap rule: New thematic funds cannot overlap more than 50% with an AMC’s existing thematic schemes

• 30-day deployment rule: NFO proceeds must be fully invested within 30 days, preventing NAV management games

These are important first steps—but investor awareness still matters most.

How to Spot Fund Slop

• Late-cycle themes: If a sector is already up 200% in two years, the NFO is probably slop

• Portfolio overlap: If the “new” fund holds the same stocks as your Flexi Cap fund, skip it

• Backtests without track record: Ten-year simulations can’t compensate for consistent underperformance of the AMC elsewhere

The Bottom Line

The Indian mutual fund industry is maturing—but maturity brings the temptation to prioritize AUM growth over investor outcomes.

Don’t let the shine of a “New Fund” distract you.Most Fund Slop is designed to be sold, not held — and rarely to compound.