DYK – difference between sector and thematic funds

Sectoral and thematic funds are the riskiest of all MF schemes

Although most mutual fund (MF) schemes swear by diversification, there are some schemes that don’t diversify. They stick to one or few sectors and prefer to cash in on their performance. Sectoral and thematic funds fall in this space. But there still is a big difference between the two. Sectoral funds aim to invest their entire corpus in one to three sectors. These sectors are closely related to one another. During 1999-2001, due to the boom in the information technology (IT) industry, sectoral funds that invested in IT companies were a rage. Some of these funds also invested in related sectors such as telecom.

For instance, Franklin Templeton India Investments had launched two such funds: one (Franklin India Infotech Fund; FIIF) that invested in only IT companies, while another fund, called Franklin India Internet Opportunities Fund (FIOF), invested in companies that used Internet to deliver their products or services. While FIIF is still around, FIOF was re-christened as Franklin India Opportunities Fund, an open-ended diversified equity scheme, in 2004. Many other fund houses, too, did the same thing after the collapse of the IT sector in 2000 and 2001, as they didn’t see much potential in them, anymore. Another example of a sectoral fund is a pharmaceutical fund.

A thematic fund, on the other hand, doesn’t hug just one sector. It invests across sectors that are woven around a common theme. Some themes around these funds have worked are infrastructure and rural India. These companies may work in different industries, but are a part of a common theme. In terms of the number of scrips and portfolio concentration, thematic funds look as diversified as diversified equity schemes, but have fewer sectors.

Risk levels

Sectoral and thematic funds are the riskiest of all MF schemes. A sector fund is riskier than a thematic fund because the former’s performance depends on the fortunes of just one to three sectors. A sectoral fund does very well if the sector in which it invests in does well. But when the sector does badly, it falls the hardest due to lack of diversification. Thematic fund is less risky comparatively as its fortunes are dependent on many sectors. For instance, ICICI Prudential Infrastructure Fund has invested across banks, cement, ferrous metals, oil, telecom and so on. But ICICI Prudential Technology Fund has invested in just one sector, software.

How to choose

Avoid sectoral funds unless you have knowledge of the sector. These are usually not meant for the lay investor. Thematic funds could be an option for you. But here, too, we suggest that unless you are adequately invested—and also diversified—in MFs, willing to add some flavour to your portfolio and are comfortable with the risks that come with thematic funds, avoid them as well.