Gen Z’s Consumption Habits and Sectoral Fund Opportunities

Mutual funds are a core, not secondary, investment choice! The BCI (Boston Institute of Analytics) report positions mutual funds (particularly via SIPs) as one of Gen Z’s most preferred investment products. 

Unlike earlier generations that treated mutual funds as long-term + low-engagement products, Gen Z sees them as:

• Accessible [low entry via SIPs starting at just ₹250 (Chotti SIP)]

• Digitally manageable

• Aligned with disciplined and potential for long term wealth creation 

Also, mutual funds sit between fixed deposits (too conservative) and direct equities/crypto (too volatile). (Source: BCI Analytics). 
 

For more clarity, let’s understand the Gen Z investing habit in detail:
 

1. Higher Income = Higher Mutual Fund Participation

The Chi-square analysis (χ² = 15.67, p = 0.018) in the IJSAT research paper establishes that “income level” significantly influences Gen Z’s mutual fund participation. 

Usually, higher-income Gen Z investors have greater surplus funds after meeting necessary expenses. This allows them to allocate money towards market-linked instruments such as mutual funds. For this group, mutual funds are viewed as “long-term wealth creation vehicles”, which may offer the potential for higher returns through:

• Equity exposure +

• Professional fund management

In contrast, lower-income Gen Z investors prioritise capital protection and liquidity. They prefer fixed deposits and other low-risk savings instruments.

2. Financial Literacy Has a Direct Relation With Mutual Fund Adoption

There is a “moderate positive correlation” between financial literacy and risk perception (r = 0.46, p < 0.01). It has been found that individuals with higher financial literacy can better comprehend:

• Market fluctuations

• Diversification benefits

• The long-term nature of mutual fund investments

As a result, they are more comfortable taking calculated risks (particularly in equity-oriented mutual funds). Rather than perceiving market volatility as a threat, financially informed Gen Z investors view it as a normal and manageable aspect of investing. 

3. Behavioural Biases Influence Mutual Fund Decisions

The IJSAT study shows that “herd mentality” plays a major role in scheme selection. Many Gen Z investors are attracted to popular or trending mutual funds promoted on:

• Social media

• Fintech platforms

• Peer networks (instead of self-evaluation).
   

Additionally, several Gen Z investors are “loss averse” and are emotionally reluctant to exit underperforming mutual fund schemes. At the same time, a few GenZ investors become “overconfident”, primarily due to:

• Early investment successes or

• Excessive exposure to market content

Such investors frequently switch between mutual funds in search of higher returns. 

The negative impact? These Gen Z investing habits/ behaviours collectively reduce the benefits of diversification and increase portfolio churn. 

Source: IJSAT Research Report
 

A sectoral mutual fund invests only in a specific industry or sector of the economy, such as banking, IT, pharma, or energy. The entire portfolio is concentrated within that single sector. 

On the other hand, a thematic mutual fund invests based on a broader investment idea or theme. And this theme can include multiple sectors connected to that concept. For example, a consumption theme may include companies from the FMCG, retail, and automotive sectors.

As per SEBI regulations, these funds must invest at least 80% of their total assets in equity and equity-related instruments that belong to:

• One particular sector (sectoral funds) or
• One defined theme (thematic funds)
   

For example, an energy sector mutual fund invests only in companies related to power, oil, gas, and renewable energy. All investments are restricted to the energy industry, and the fund’s performance depends on how this sector performs.

Now, since the exposure is limited to one sector, returns could potentially be higher during sector growth. However, there is also a very high risk due to a lack of diversification. The fund’s NAV may drop significantly during periods of:

• Sector-specific slowdown
• Regulatory changes
• Adverse market conditions affecting that sector

The AMFI Fiscal 2025 Report shows that sectoral/ thematic funds held the largest equity AUM share at 15% (tied with flexi cap). Moreover, out of 70 New Fund Offers (NFOs) introduced in FY2025, 52 were Sectoral/Thematic funds. They collectively raised a substantial investment of ₹73,633 crore. 

In comparison, FY2024 saw 58 NFO launches, of which 37 were Sectoral/Thematic funds (raising ₹25,493 crore). The interpretation? There is a strong + growing preference for theme-based equity investing. 
Source: AMFI Fiscal 2025 Report

Sectoral funds may suit some Gen Z investors in 2026, but they are not “universally ideal”. Their suitability may depend on:

• Income stability

• Financial literacy

• Time horizon

• Behavioural discipline

Always remember that a “deeper evaluation” is necessary because these funds combine high growth potential with concentrated risk. For a better understanding, let’s see some reasons why sectoral/thematic funds may appeal to Gen Z in 2026:
 

A) Digital Awareness + Trend Recognition

As mentioned before, Gen Z investors are highly exposed to market narratives through:

• Fintech platforms

• Social media

• Financial content

The advantage? This makes them more aware of “emerging sectors” such as renewable energy, EVs, defence, infrastructure, and technology. Sectoral/thematic funds provide a way to invest in such sectors/themes respectively without picking individual stocks.

B) Higher Risk Appetite at an Early Stage

With fewer financial responsibilities and a longer investment horizon, Gen Z investors are generally more open to risk. Sectoral funds may potentially deliver better returns during sector upcycles, which might appeal more to younger investors

As per SEBI regulations, sectoral funds invest at least 80% of assets in one sector. Now, that sector may underperform due to:

• Economic slowdown

• Policy changes

• Global disruptions

In such cases, the fund’s NAV can fall sharply. Younger investors may not yet have the experience to withstand such volatility. Additionally, some more risks you must be aware of are:
 

A) Cyclical Nature of Sectors

Most sectors move in cycles. A sector that performs strongly for a few years can enter a long period of stagnation. Gen Z investors influenced by recent performance may enter these funds “late” in the cycle. This may reduce their potential long-term returns.

B) Behavioural Biases

Research shows Gen Z investors are prone to herd behaviour + overconfidence. In thematic and sectoral funds, this usually leads to:

• Chasing trending sectors

• Over-allocating to one theme

• Exiting during “temporary downturns.”

Again, these behaviours reduce the benefits of long-term investing.

So now you know about Gen Z’s investing habits in India. Most Gen Z investors prefer mutual funds, ranking them among their top three investment options, after individual equity shares and cryptocurrencies. 

But which mutual fund schemes does Gen Z choose? This largely depends on income levels and individual risk profiles. Higher-income and financially aware investors are more open to equity-oriented funds, while others prefer conservative options. 

If we look at recent trends, sectoral and thematic mutual funds stood out in 2025, attracting the highest share of equity AUM at nearly 15%. In 2026, these schemes may suit Gen Z investors as they offer:

• Exposure to “emerging” economic themes

• Higher return potential during upcycles

• High compatibility with “digital-first” investing

However, always remember that thematic and sectoral funds invest in a single sector or theme and carry high concentration risk. As a Gen Z investor, you must thoroughly assess your risk appetite before committing funds.

The views mentioned above are for information & educational purposes only and do not construe to be any investment, legal, or taxation advice. Investors must do their own research before investing. The views expressed in this article are personal in nature and in is no way trying to predict the markets or to time them. Any action taken by you on the basis of the information contained herein is your responsibility alone, and Tata Asset Management Pvt. Ltd. will not be liable in any manner for the consequences of such action taken by you. Please consult your Mutual Fund Distributor before investing. The views expressed in this article may not reflect in the scheme portfolios of Tata Mutual Fund. There are no guaranteed or assured returns under any of the schemes of Tata Mutual Fund.