Are thematic and sectoral funds worth the risk?
In the right market environment, a well-timed sectoral allocation can enhance portfolio returns, but such gains come with elevated risks.
MUMBAI : Sectoral and thematic funds experienced a strong performance in 2025, with a handful of focused strategies delivering outsized returns. Funds tracking the Nifty PSU Bank Index and the Nifty Metal topped the charts with returns of about 30% each, followed closely by the Nifty Auto at around 24%. These performances stood out even as broader equity markets delivered moderate gains.
The rally in state-run bank stocks was driven by a favourable macro backdrop. Falling interest rates, improved liquidity conditions and relatively attractive valuations helped state-owned lenders outperform their private-sector peers.
Auto stocks benefited from steady improvement in vehicle demand and a recovery in consumer sentiment, while metal stocks rode higher commodity prices and improved global cues. Defence-related stocks also delivered strong returns, with the Nifty India Defence rising nearly 19% during the year, supported by increased government spending and rising export opportunities.
According to Sirshendu Basu, head of product management and strategy at Bandhan Asset Management Company, sectoral and thematic funds can provide targeted exposure to long-term structural trends that may not be adequately captured by diversified equity portfolios. In the right market environment, a well-timed sectoral allocation can enhance portfolio returns.
The volatility factor
However, experts caution that such gains come with elevated risks. Sectoral funds are inherently more volatile because of their concentrated exposure. “Leadership in sectors can change quickly," said Vishal Dhawan, founder and chief executive officer of Plan Ahead Wealth Advisors.
This volatility has been evident in recent years. The Nifty Realty Index delivered stellar returns of 81% in 2023 and 34% in 2024, only to decline more than 16% in 2025. Auto and metal stocks have also seen sharp swings, underscoring how quickly sector cycles can turn.
Given these risks, advisors recommend using sectoral and thematic funds only as part of a satellite allocation, rather than forming the core of an investment portfolio.
Timing also plays a critical role in sector investing. “Sectors and themes are cyclical and carry significant timing risk, both at entry and exit," said Kaustubh Belapurkar, director, manager research at Morningstar Investment Research India. Phased investing can help mitigate this risk by spreading investments across market conditions rather than committing capital at a single point.
For investors unsure about identifying the right sectors or managing volatility, diversified equity funds are a better option. These allow fund managers to take calibrated sector overweights and underweights without exposing investors to extreme concentration risk. First-time and less experienced investors, experts say, should generally avoid narrow sectoral bets.
Even for seasoned investors, discipline is essential. Over-allocating to sector funds or chasing recent performance often leads to disappointment when the cycle reverses. Sectoral investments require patience, periodic review and a willingness to rebalance when the original investment rationale no longer holds. Additionally, it requires regular tracking and timing entry and exit to perfection, which is not something retail investors are expected to be able to execute consistently.
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