If you have been exploring mutual funds, chances are you have come across sectoral and thematic funds. They sound promising and are associated with impressive returns. But you might be thinking whether they’re actually a good investment or a high-risk option that’s not worth it. Before you take a call, let’s help you decide and decode all the factors that matter when choosing sectoral and thematic funds.
What’s the difference between sectoral and thematic funds?
Here is a simple comparison to clear out any doubts.
| Feature | Sectoral Funds | Thematic funds |
| Investment Focus | Invested in a single sector like banking, healthcare or IT. | Funds are invested in multiple sectors like EVs, Digital Innovation, ESG investing, etc. |
| Diversification | Limited diversification | Relatively more diversified |
| Risk Level | High risk as performance depends on one sector. | Moderate risk since various sectors contribute to performance. |
| Investment Horizon | Medium term (3-5 years) | Long term (5-7 years) |
| Return Potential | Depends on the sectors’ performance | Depends on how the theme performs |
Both fund types target specific opportunities. However sectoral funds are narrower while thematic funds are broader.
Why are these funds becoming popular?
Many investors are drawn to these funds because they have a possible outcome for high returns. Certain themes and sectors have performed well in the past which makes them attractive options. For example:
- During COVID-19, the pharma sector funds gave us good returns because the demand of healthcare went up. This is a great example of how market trends have an impact on investments.
- After the pandemic, the IT sector grew fast as many businesses went digital. This shows how important technology is for the future of investing.
- The EV and renewable energy sectors are set to grow as India focuses on sustainability. These are becoming popular as government support and demand increase.
When a sector or theme is doing well, these funds can give higher returns than regular equity funds. But they also come with their own risks.
The risks you should be aware of
While these funds have great growth potential, they aren’t for everyone. If you understand market trends and don’t mind ups and downs, you could consider these funds.
- Sectoral funds
Since these funds focus on a single sector, they can experience extreme highs and lows. If the sector does well, returns can be high. But if the industry faces any challenges like new regulations or global issues then your investment could take a hit.
- Thematic funds
Thematic funds invest in different industries within a theme. This makes them a bit less risky than sectoral funds. But their performance still depends on how well that theme does.
Basically, these funds should not be your primary investment. If you are trying to diversify your portfolio then they are a great opportunity. However not as a standalone choice.
Who should invest in these funds?
If you are unsure whether sectoral and thematic funds fit your investment style, let us help you.
- Risk level
These funds can be volatile. So, they work best for investors who are comfortable with high risks. If you prefer steady growth, traditional equity funds can be a better choice.
- Industry knowledge
If you have knowledge about that specific sector or theme, then they are a good option. It is always better to invest in areas that you are familiar with or willing to learn.
- Stable portfolio
If your core investments are well diversified then adding these funds can be a smart move. But if your portfolio is risky then it might not be the best time.
- Think about your time frame
These funds usually work better for short to medium term goals. If you want to invest for long term goals, then other options can be more suitable.
How to invest wisely in sectoral and thematic funds?
If you decide to invest, it is important to do the right way. Here are some ways to get started:
- Start small
Allocate only 5-10% of your portfolio to these funds instead of making them your primary investment.
- Use a mutual fund calculator
Before investing, try a lumpsum calculator. It helps you estimate returns and understand the risks. If you’re unsure about market timing, SIP plans can be a good option. They reduce volatility and help grow your wealth steadily.
- Regularly monitor
These funds require active tracking. Unlike diversified funds, you must stay updated on the market trends and regularly monitor them.
- Exit at the right time
These funds are often cyclical. This means they perform well during certain market conditions but may decline later. So book profits when a sector or theme peaks.
The key is to avoid investing just because of hype. These decisions should be well thought out and based on what fits your financial goals. A balanced approach is always the best strategy.
To answer your question, sectoral and thematic funds are worth the hype. However, they depend on your risk appetite, investment strategy and how well the fund aligns with your goals.