DT Personal Finance: Should you invest in sectoral or thematic funds?

CHENNAI: When investing in mutual funds, people tend to use the words ‘thematic’ and ‘sectoral’ interchangeably. But while they are similar to an extent, there is a non-ignorable difference between the two.

As the name suggests, a sectoral fund invests in stocks of a single sector only. For example – there can be sectoral funds like pharma fund, IT fund, auto fund, etc. A thematic fund on the other hand has a broader canvas and invests in stocks from not just one sector but a bigger theme (which may be made up of more than one sector). So as an example, an Infrastructure themed fund will have stocks from sectors like construction, capital goods, mining, energy, etc.

It would be clear that sectoral funds are more concentrated (due to single sector) than thematic funds. But both categories are much less diversified than the regular categories like largecap funds, midcap funds, etc. which have stocks from several sectors.

So, what should common investors do?

Should they invest in sectoral or thematic funds? Or they are better off without them?

Let’s remember first as to why we invest in mutual funds. Most people don’t have the time or skill to pick stocks regularly and profitably. And it is for this reason, the whole concept of mutual funds came into existence – to invest in a diversified and carefully curated bucket of stocks on behalf of investors. Isn’t it?

So, while mutual fund categories like largecap funds, flexicap funds, etc. provide sufficient diversification, investing in the thematic or the sectoral fund means you are going against the spirit of diversification. Nothing wrong in it unless you are an expert in the field.

Theoretically, concentrated portfolios can deliver great returns. But if the theme or sector is out of favour, it can do poorly as well. So, there are risks in taking this route which aren’t suitable for most investors. In my view, sectoral and thematic funds are best avoided by most small investors.

The diversified fund categories like largecap funds, flexicap funds, large and midcap funds, midcap funds, etc are more than sufficient for most investment outcomes that such investors desire.

Having said that, I must also identify who are suited to invest in such funds. Investors who have a high-risk appetite and oodles of patience can consider this. Remember, a sector/theme may not do well for years so you will need patience. Also, well-informed investors who have a reasonably good understanding of sectors/themes can consider these funds.

Now comes the next question.

If one really wants to invest in such sectoral or thematic funds, then how much should be invested?

Ideally, it is better to limit your exposure to thematic/sectoral funds to 10-15% of your portfolio. A lower allocation will anyway not matter and a bigger allocation will increase the portfolio concentration risk.

One can also look at these funds for non-core satellite allocation of the portfolio. While the core will be from categories like largecap index funds, flexicap funds, etc., the satellite portion can have funds from high-risk-high-reward categories like sectoral or thematic funds if you know what you are getting into.

So, to summarise, most small investors can skip these categories. And if you still wish to invest, limit your exposure to 10-15% only. And as always, if you have doubts about what is right and what isn’t in your portfolio, it would be best to get in touch with an investment advisor.

—(Dev Ashish is a SEBI-registered investment advisor and founder of

Stableinvestor.com, who provides fee-only investment advisory services)