Sectoral and Thematic Fund
Sectoral and thematic funds are equity mutual funds that concentrated at least 80 percent of their portfolio in stocks belonging to a specific sector (such as banking or pharma) or a broader investment theme (such as consumption, infrastructure, or ESG), as defined by SEBI's mutual fund categorisation framework.
SEBI's 2017 categorisation circular defined sectoral funds as those investing at least 80 percent in a single sector — banking, IT, FMCG, pharmaceuticals, energy, or any other defined sector. Thematic funds operated on a slightly broader canvas: instead of a single sector, they followed an investment theme that could span multiple sectors. A consumption theme fund, for example, held consumer goods, retail, media, auto, and FMCG companies together under the umbrella of domestic consumption growth. An infrastructure theme could include cement, engineering, power, logistics, and construction companies across sectors.
In India, the proliferation of thematic fund launches was particularly pronounced from 2021 onwards, coinciding with strong investor appetite for narratives around digital India, EV transition, defence manufacturing, PLI (Production Linked Incentive) beneficiaries, manufacturing renaissance, and green energy. AMCs launched dozens of thematic NFOs during this period, often capitalising on recent strong performance in the relevant sector or theme to attract subscriptions.
The fundamental risk in sectoral and thematic funds was concentration. Unlike diversified equity funds that spread risk across multiple sectors, a sectoral fund's performance was entirely tied to the fortunes of one industry. A pharmaceutical fund, for instance, was acutely sensitive to US FDA observations, USFDA import alerts, domestic pricing pressures from NPPA, and the global generic drug pricing environment — factors that could drive sustained underperformance even in a broadly rising market. Similarly, banking sector funds were directly exposed to the NPA cycle, interest rate direction, and regulatory changes.
Cyclicality was another feature of sectoral investing. Most sectors experienced meaningful cycles of outperformance and underperformance relative to the broader Nifty 500. Investors who entered at the peak of a cycle — often attracted by recent stellar returns and high media coverage — faced multi-year recovery periods. The classic cautionary example in India was the infrastructure theme of 2006–2008, when massive capital was committed at peak valuations, followed by a decade of underperformance.
For investors who had strong views on specific macro trends or sectoral developments, sectoral and thematic funds provided targeted exposure. They were also used by tactical investors seeking to complement a core diversified portfolio with a satellite allocation. Given the higher risk and volatility compared to diversified equity funds, AMFI regulations required that distributors ensured investors understood the concentrated nature of these products before committing capital.