Sectoral and thematic funds: reward, risk or marketing?

One category, very different funds

A sectoral fund must invest at least 80% of its money in one sector, such as banking, pharma or technology. A thematic fund invests in a broader idea that spans sectors: manufacturing, consumption, infrastructure, defence or the business cycle. SEBI puts both in the same category, and AMFI reports them together.

That shared label hides very different funds. The sectoral and thematic funds guide explains how they are built. Here is how they have behaved.

The spread is the story

We took the Direct Growth plans of the domestic funds in the category, leaving out funds that invest abroad, and grouped them by the theme in their name. Returns are computed from daily NAVs to 1 October 2026. "Worst fall" is each fund's largest peak-to-trough decline over the last three years, and the table shows the median for each theme.

The "all" row includes 99 funds whose themes do not fit the groups above, such as innovation, quant-driven or special-situations funds.

The median is respectable. Over three years, the median domestic sectoral or thematic fund returned 12.82% a year against 11.03% for flexi-cap funds, and 81 of the 136 beat the flexi-cap median.

The range is the risk. The best fund in the category, HDFC Defence, returned 36.08% a year. The worst, ICICI Prudential FMCG, lost 4.37% a year. Between the median pharma fund and the median technology fund, the gap was 16 points a year. Among flexi-cap funds, the best and worst three-year returns were 12 points apart. Among sector funds they were 40 points apart.

Themes swing hard. Technology funds are at the bottom on three-year returns and next to bottom over one year, and had the deepest median fall of any large group, 29%. Consumption funds lost a median 8.4% over the last year. Pharma funds lead on both. A diversified fund holds some of each; a sector fund holds only one.

High risk, high reward?

The risk is real. A diversified fund's manager can move money out of a sector that is struggling; a sector fund's manager cannot, because the mandate requires the money to stay in that sector. When the sector has a bad few years, so does every fund in it, and the investor bears the full fall.

The reward is real too, but only for the investor who held the right sector at the right time and stayed. That requires two calls, getting in and getting out, and each is hard. Investors in sector funds often make both calls on recent returns, which means buying after a run and selling after a fall. The recency bias guide explains why that pattern is so common.

Or a marketing trap?

The supply of new funds is a clue. Of the 256 funds in the category with a current NAV, 137 were launched in 2023 or later, including 53 in 2024 alone. Nearly half the category (114 funds) has no three-year record at all.

A new fund offer (NFO) on a theme is easiest to sell when the theme is in the news, which tends to be after its best stretch. The fund house earns fees on the money raised whatever the theme does next. That is not proof that any new fund is bad. It does mean the choice of which themes are launched, and when, says more about what sells than about what will do well.

Two other costs are easy to miss:

• Overlap. Many "thematic" funds hold the same large banks, industrials and consumer companies that your diversified funds already own. Check the top holdings before assuming you are adding something new.
• Fees. Sector and thematic funds are active funds with active fees. On the latest AMC disclosures, their Regular plans cost a median 1.2 to 1.5 points a year more than their Direct plans; our post on what a Regular plan costs in rupees shows what that adds up to.

If you do use them

• Hold a sector fund because you have a reason to own that sector for five years or more, not because of its last year's return.
• Keep it small. A core and satellite structure, with diversified funds as the core and any sector bets as a limited satellite, means one wrong call does not decide your outcome.
• Decide in advance what would make you sell, and write it down. "It fell" is not a reason on its own; every sector falls.
• Check the theme's spread before the fund: within banking funds alone, three-year returns ran from 5.8% to 21.1% a year.

You can compare funds within the category on the sectoral and thematic page or filter by theme in the screener.

This post is for education only and is not investment advice or a recommendation to buy or sell any fund. Past returns do not predict future returns.