Passive investing is no longer just about buying the Nifty 50 or the Sensex. As index funds and exchange-traded funds (ETFs) become mainstream, fund houses are increasingly launching sectoral or thematic products tracking banks, metals, energy, chemicals, defence, capital markets and more.
The timing has helped. Even as headline indices have struggled, several sectoral indices have delivered strong returns, attracting investor interest. In the six months to 30 July 2026, the Nifty 50 Total Return Index (TRI) fell 3.3%, while the Nifty 500 TRI gained just 1.8%. Over the same period, the Nifty Pharma TRI rose 22%, Nifty Healthcare 20.8%, Nifty Realty 15.3%, Nifty Capital Markets 13% and Nifty India Defence 12.7%. TRI returns capture both stock price gains and dividends.
Passive sectoral or thematic funds simply track their underlying index. Their base expense ratios range from about 0.14% to 0.50%, offering investors a relatively low-cost way to gain exposure to specific sectors or themes.
Beyond broad indices
The appeal is straightforward: investors get exposure to an entire sector without taking fund manager risk.
"If you want exposure to a particular sector but don't want to take fund manager risk, sectoral ETFs and index funds are a good way to do it," said Anubhav Srivastava, partner and fund manager at Infinity Alternatives.
Fund manager risk refers to the possibility that a manager's stock selection or portfolio weightings underperform the sector benchmark. A passive fund eliminates that risk by simply holding the index.
"If investors can identify favourable sector cycles, then such funds can be useful," said Anish Teli, managing partner at QED Capital Advisors. "Rather than trying to identify the winning individual stocks, investors can simply gain exposure through a sector fund."
A thematic index differs slightly from a sectoral index by tracking a broader investment idea rather than a single industry.
Defence is one such theme. Companies sit across capital goods, autos and chemicals. As of 30 June 2026, the Nifty India Defence index was 74% capital goods, 14.47% automobiles and auto components, and 11.53% chemicals.
Know the risks
Investors should understand how these indices are constructed before investing.
"Investors should always understand how the underlying index is constructed," said Teli. "Many sector indices are market-cap weighted, meaning one or two companies can dominate the portfolio."
Thematic indices can also be concentrated. As of 30 June 2026, in the Nifty India Defence index, Hindustan Aeronautics carried a weight of 19.93%, while Bharat Electronics accounted for 19.79%.
These tend to be narrow portfolios. Nifty IT holds just 10 companies, while Nifty Realty and Nifty Private Bank each hold 10. Nifty Bank has 14 constituents, Nifty Auto and Nifty Metal 15 each, and Nifty India Defence holds 19 stocks.
Market-cap weighting, however, also helps with liquidity.
"It generally improves liquidity because the larger companies also typically have higher trading volumes," said Teli.
There are safeguards against excessive concentration. Sectoral indices such as Nifty Healthcare, Nifty Pharma and Nifty IT cap any single stock at 33% and the top three combined at 62%. Nifty India Defence caps each stock at 20%.
These weights are rebalanced quarterly on the last trading day of March, June, September and December, while index constituents are reviewed twice a year. Between rebalancing dates, funds continue to hold stocks in line with the index, even if a heavyweight undergoes a sharp correction.
"Sectors and themes are cyclical and carry significant timing risk, both at entry and exit," pointed out Kaustubh Belapurkar, director, manager research at Morningstar Investment Research India.
According to Teli, investors should also be cautious about investing in new fund offers (NFOs).
"Often a sectoral fund gets launched when the sector is already hot and drawing investor interest, and that is often not the right time to enter. An investor should never rush into a sector or theme because of FOMO."
Tracking error and tracking difference are other things to watch out for—how closely the fund replicates its benchmark.
"Before investing in a passive fund of a new fund house, it is advisable to observe its performance over two to three years and examine how effectively the fund house manages tracking error, because that depends on its execution capability," said Teli.
ETF or index fund?
For most investors, an index fund is the simpler option. It is purchased at end-of-day net asset value (NAV), supports systematic investment plans (SIPs) and does not require a demat account.
An ETF, meanwhile, trades on stock exchanges. Investors incur brokerage, bid-ask spreads and impact costs in addition to the expense ratio, and a demat account is mandatory. ETFs can also trade above or below their indicative net asset value (iNAV).
"Investors coming into ETFs need to understand how ETFs work. They should check the iNAV of the ETF, compare it with the traded price, and only transact when the spreads are narrow," said Srivastava.
"If an investor buys at a premium, they should recognise that the premium itself can disappear when there is a correction."
The advantage is flexibility. Since ETFs trade throughout the day, investors can take advantage of intraday market movements.
Tactical allocation
"These are tactical calls, so not more than 15-20% of the portfolio, and they belong in the satellite portion, not the core," said Teli.
"Investors should avoid spreading this allocation across too many themes, as it can dilute the impact of these funds on the overall portfolio."
Still, these funds are not suitable for everyone. Investors with a higher risk appetite who understand sector cycles and can judge entry and exit points may consider allocating a portion of their portfolio to them.
For everyone else, experts say diversified equity funds remain the better option, leaving sector allocation decisions to professional fund managers.