Sectoral and thematic funds

Most equity funds spread across the market. Sectoral and thematic funds do the opposite on purpose: they narrow down to one part of it. That focus is what people buy them for, and it is also the source of their particular risk. Understanding both the appeal and the risk — and the difference between the two kinds — comes before any decision about whether such a fund belongs in a portfolio at all.

What a sectoral fund is

A sectoral fund invests in the companies of a single sector — for example banking, technology, pharmaceuticals or energy. Its mandate binds it there: a banking fund holds banks and lenders, and it stays in that sector whether the sector is in or out of favour. The fund manager can choose which companies within the sector to hold, but not to leave the sector behind.

What a thematic fund is

A thematic fund is a little broader. It follows a theme that cuts across several sectors — consumption, infrastructure or manufacturing, say — and holds companies from each sector that fit the idea. A consumption theme might include carmakers, retailers and consumer-goods firms at once. So a theme is wider than a single sector but still far narrower than the whole market: a chosen idea rather than a chosen industry.

How the two differ

The line between them is scope. A sectoral fund is tied to one industry; a thematic fund is tied to one idea that may span many industries. A technology fund is sectoral; a “digital India” fund that holds technology, telecom and some financial companies is thematic. In practice both behave as concentrated bets on a slice of the market, which is why they are usually discussed together.

The concentration risk

Concentration is the point and the risk in one. A diversified fund can move away from a part of the market that is struggling; a sectoral or thematic fund cannot, because its mandate holds it in place. When the chosen sector or theme is out of favour, the whole fund feels it, with no other holdings to cushion the fall — so the range of outcomes is wider than a broad fund’s. There is also timing risk: sectors and themes tend to run in cycles, and buying one after it has already had a strong run is a common way to arrive late. None of this is a prediction of return; it is a description of why a narrow fund swings more than a broad one.

Where they sit in the category map

Cap categories such as large, mid and small-cap sort funds by the size of the companies they hold. Sectoral and thematic funds cut a different way — by the part of the market they cover — and sit at the concentrated corner of the equity shelf, opposite a broad index fund that owns the market as a whole. A scheme document states which sector or theme a fund is committed to and the limits it works within.