Sectoral vs. Thematic Funds – Which One Is Right for You?

A sectoral mutual fund is an equity mutual fund scheme that invests at least 80% of its assets in equity and equity related companies belonging to a single sector of the economy like banking or IT. The performance of such funds depends directly on how that sector performs. If the underlying sector is doing well, investors of the fund benefit from it. However, if the sector is going through a downturn, the fund may underperform. 

By investing in only one sector of the economy, these funds limit diversification. Since sectoral mutual funds concentrate their investment in one sector, they may be comparatively riskier than regular diversified mutual fund schemes. 

Example list of sectoral mutual funds:

• IT funds that invest in IT service providers, data centers, and software companies.

• Banking and financial services funds that invest in stocks of non-banking financial companies, asset management companies, and housing finance companies.

• Pharma funds that invest in pharma companies, medical device manufacturers, biotechnology firms, hospitals, and other healthcare-related companies. 

   

• Invest only in one industry or sector.

• Returns on sectoral mutual funds may depend on the growth and challenges of that specific sector.

• Highly concentrated in a particular sector/ theme, with limited diversification.

• May perform well during sector up-cycles but can underperform during downturns.

• Carry higher risk compared to diversified equity funds.

   

A thematic mutual fund invests at least 80% of its assets into equity and equity related instruments of companies connected by a specific broad theme like sustainability or renewable energy. In other words, thematic funds take a broader approach by investing in companies that align with a particular theme or megatrend across sectors. 

Thematic funds aim to generate returns for investors by capitalising on the growth of companies related to a specific theme, across sectors. This allows for a wider spread compared to sectoral funds but still keeps investments focused on one idea.

Examples of thematic funds include:

• ESG funds that invest in companies focusing on environment, social responsibility, and good governance practices.

• Services funds that invest in businesses across IT services, telecom, logistics, and consumer services.

• PSU funds that invest in public sector companies across banking, energy, infrastructure, and manufacturing.

   

• Invest in multiple sectors linked by one theme.

• Broader diversification compared to sectoral funds.

• Still concentrated, as exposure is tied to one theme.

• Can capture long-term structural trends like digitisation or sustainability.

• Performance depends on how the chosen theme plays out over time.

   

The key differences between sectoral mutual funds and thematic funds are outlined below:

Advantages of Sectoral Funds

• Possibility of enhanced growth potential if the selected sector surges.

• Allows you to make targeted investments in sectors you believe have a strong growth potential in the future.

Limitations of Sectoral Funds

• High risk due to lack of diversification.

• Cyclical in nature and highly susceptible to market volatility.

• Investing sectoral mutual funds may require good knowledge of sector dynamics and precisely timed entry and exit.

Advantages of Thematic Funds

• Broader market exposure with investments spanning across different sectors.

• Wider diversification helps spread investment risks and avoid overconcentration. 

• Potential for high returns if the theme they invest in performs well.

Limitations of Thematic Funds

• High concentration risk because returns depend on the performance of the selected theme.

• Concentrated exposure to a theme makes these funds more volatile than diversified equity mutual funds. 

Knowledge and understanding of the underlying theme needed. 

Thematic and Sectoral Tata Mutual Fund Schemes you may consider investing in

Scheme Type: An Open-ended equity mutual fund scheme following innovation theme.

Investment Objective:  The investment objective of the scheme is to provide investors with opportunities for long term capital appreciation by investing in equity and equity related instruments of companies that seeks to benefit from adoption of innovative strategies & theme. However, there is no assurance or guarantee that the investment objective of the scheme will be achieved. The scheme does not assure or guarantee any returns. 

The investment strategy of this fund is based on allocating capital to leading companies shaping the competitive landscape through innovation. Focus areas include:

• Creation of new products or services
• Development of groundbreaking processes
• Introduction of new consumer values or behaviors
• Transformation of customer outreach via technology or disintermediation
• Delivery of tech advancements leading to enhanced/new offerings

Note: Please read Scheme Information Document (SID) for more details.

Scheme Type: An open-ended equity mutual fund scheme following business cycles-based investment theme

Investment Objective: To generate long-term capital appreciation by investing with focus on riding business cycles through allocation between sectors and stocks at different stages of business cycles. However, there is no assurance or guarantee that the investment objective of the Scheme will be achieved. The scheme does not assure or guarantee any returns.

The Scheme aims to adopt a business cycle approach to investing by identifying economic trends and allocating to sectors and stocks likely to outperform at different stages of the cycle. The fund manager will assess economic parameters (such as the current account deficit, fiscal deficit, interest rates, and inflation), investment indicators (including capital expenditure and project approvals), as well as business and consumer sentiment (purchasing managers’ index, business confidence index, sales of consumer discretionary products, etc.) to determine whether the economy is in an expansion or contraction phase.

Note: Please read Scheme Information Document (SID) for more details.

Tata Business Cycle Fund Direct Growth Plan 

Scheme Type:  An open ended equity scheme investing in Banking and Financial Services Sector

Investment Objective: The investment objective of the scheme is to seek long term capital appreciation by investing at least 80% of its net assets in equity/equity related instruments of the companies in the Banking and Financial Services sector in India. However, there is no assurance or guarantee that the investment objective of the Scheme will be achieved. The Scheme does not assure or guarantee any returns.

The Tata Banking & Financial Service fund provides focused exposure to India’s expanding financial ecosystem, capturing opportunities across banks, NBFCs, insurance, and allied services. With structural trends like digital banking, financial inclusion, and rising insurance penetration, the scheme seeks to benefit from long-term growth drivers shaping the financial services sector in India.

Note: Please read Scheme Information Document (SID) for more details.

Scheme Type:  An open-ended equity scheme investing in Pharma and Healthcare Services Sector.

Investment Objective: The investment objective of the scheme is to seek long term capital appreciation by investing at least 80% of its net assets in equity/equity related instruments of the companies in the pharma & healthcare sectors in India. However, there is no assurance or guarantee that the investment objective of the Scheme will be achieved. The Scheme does not assure or guarantee any returns.

The Tata India Pharma and Healthcare Fund offer focused exposure to India’s evolving healthcare ecosystem, spanning pharmaceuticals, hospitals, diagnostics, and allied services. It may also allocate selectively to other equities and maintain a portion in debt or money market instruments for liquidity. This approach allows participation in both sector growth and portfolio stability.

Note: Please read Scheme Information Document (SID) for more details.

You can consider choosing sectoral funds if:

• You have high risk tolerance.

• You strongly believe in the growth of a particular industry.

• You want focused exposure to one sector.

You can choose thematic funds if:

• You want exposure to multiple sectors under a single theme.

• You believe in long-term structural ideas like sustainability or digitisation.

• You want slightly broader diversification than a pure sector fund.

   

Before you invest in either a sector fund or a thematic mutual fund, you should consider the following factors: 

• Check alignment with your financial goals and time horizon.

• Understand that both fund types are concentrated and can be volatile in the short term.

• Consider using these funds as satellite allocations, not the core of your portfolio.

• Review performance regularly to ensure balance with diversified equity funds.

• Avoid investing only on the basis of recent past returns.

   

Both sectoral mutual funds and thematic mutual funds offer ways to invest in focused parts of the market. Sectoral funds give narrow exposure to one industry, while thematic funds cast a wider net across sectors connected by a trend or theme.

If you are exploring these funds, ensure they match your risk appetite, goals, and investment horizon. Typically, both sector funds and thematic funds are well-suited for seasoned investors with knowledge of sector dynamics and thematic investment with high risk appetite . If you do decide to invest in these funds, its prudent to keep your allocation limited, diversify with other fund types, and track performance regularly. This way, you can make informed choices without overexposing your portfolio to concentrated risks.