What are sectoral mutual funds? Strategy, concentration risk and overlap explained

Mutual Funds: When planning to invest in mutual funds, you face several decisions: how much capital to invest, which AMC to choose, and, most importantly, which category to select (e.g., large cap, mid cap or small cap).

Among several categories of funds, investors tend to invest in sectoral/thematic mutual funds to gain exposure to a specific sector or concept.

What are sectoral and thematic funds?

• Sectoral mutual funds invest only in companies belonging to a single sector, such as infrastructure, technology, banking or pharmaceuticals. Because they focus primarily on one area, they limit diversification and are inherently riskier.
• Thematic funds are broader. They pick stocks based on a particular theme, such as infrastructure, service industries, PSUs, or MNCs. They are more diversified than sectoral funds and therefore carry a slightly lower risk profile.

What are the advantages of investing in these funds?

1. Growth potential: Most sectoral funds are active mutual funds, which means fund managers have complete autonomy over which funds to pick and which not. This presents an opportunity for investors with a high risk appetite.

2. Ride the tide: Investors sometimes want to make the most of an ongoing trend. For example, someone may want to ride the tide on the infrastructure sector during a time when there is too much emphasis on it.

3. Commitment to a sector: Another advantage of investing in sectoral/thematic funds is that they allow you to stay invested in a broader theme you strongly believe in. For example, someone who has invested their time and efforts in the environment and sustainability would like to choose this as a theme that becomes a sizable chunk of their portfolio.

4. Diversity: Most other mutual funds give similar (if not the same) returns across fund houses. For instance, if you choose a Nifty 100 fund, it will offer predictable returns across most funds.

On the other hand, sectoral or thematic funds add a degree of diversity and thrill to your portfolio. These funds may rise or fall based on the stock picks by fund manager(s), policy decisions by the government, which may turn out to be favourable (or unfavourable) to this sector and overall economic growth.

5. For want of choices: Another reason to choose sectoral/thematic funds is that these have a lot of innovation and permutations possible. While one fund house can launch only one scheme in one category, there is no limit to the number of innovative combinations which an AMC can come up with.

No prizes for guessing, then, sectoral/thematic funds are among the most popular categories of funds, with 231 schemes and an AUM of ₹5.33 lakh crore, as shown by AMFI data as of 31 October 2025.

What are the disadvantages of investing in them?

1 Risky to invest: These funds are risky to invest in because the entire portfolio is concentrated in one particular sector or theme. Therefore, if something goes wrong with that sector, the entire portfolio suffers a decline.

2 Limited options at times: Some sectors are heavily concentrated in a handful of stocks. So, while you may believe that you have invested in a sector but it is almost like investing in a few stocks. Some sectors, meanwhile, follow an index, such as an IT sectoral fund, which may simply track the Nifty IT index.

3. Duplication for avid investors: As an avid investor, you may already hold these stocks in other funds. For example, if you have exposure to large cap funds, it means you have already invested in the stocks of top banks such as HDFC Bank or ICICI Bank. Then investing in banking sectoral funds would further raise your exposure to these stocks. So, there is some degree of overlap between different categories of funds including sectoral/thematic fund

Note: This story is for informational purposes only. Please speak to a SEBI-registered investment advisor before making any investment related decision.