Mutual funds have evolved far beyond simple equity and debt categories. Today, investors have access to specialized options like thematic funds and sector funds—two categories that allow you to take concentrated bets based on specific ideas or industries. But the question remains: thematic funds vs sector funds—which is better for you? Let’s break it down.
What Are Thematic Funds?
Thematic funds invest across multiple sectors that align with a broad theme. For example, a “Digital India” thematic fund could invest in IT companies, fintech firms, telecom, and even e-commerce businesses—anything that fits the “digital growth” story.
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They diversify across sectors but are tied to a central theme.
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Popular themes include infrastructure, ESG (Environmental, Social, Governance), consumption, and technology.
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Returns depend on how the overall theme performs in the economy.
What Are Sector Funds?
Sector funds are more specific. They invest only in one industry, such as banking, healthcare, IT, or energy.
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Example: A banking sector fund invests only in banks and financial services companies.
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High-risk, high-reward: If the sector does well, returns can be extraordinary. If not, losses can be steep.
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These are cyclical and depend heavily on the sector’s performance.
Difference Between Thematic and Sector Funds
Here’s a quick look at the difference between thematic and sector funds:
| Aspect | Thematic Funds | Sector Funds |
|---|---|---|
| Scope | Multiple sectors linked by a theme | Only one sector |
| Diversification | Higher (across industries within theme) | Lower (concentrated in one sector) |
| Risk | Moderate to High | High |
| Returns | Depends on theme’s overall performance | Depends on specific sector’s cycle |
| Example | “Digital India Fund” (IT, telecom, e-commerce) | “Banking Fund” (only banks & NBFCs) |
Thematic vs Sector Mutual Funds in India
In India, both thematic and sector funds have gained traction due to changing market trends and government policies. For instance:
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Thematic funds in India like infrastructure or manufacturing funds benefit from policy-driven growth.
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Sector mutual funds in India such as IT or pharma funds gained massively during the pandemic, but also faced sharp corrections.
So, should I invest in thematic funds or sector funds? The answer depends on your risk appetite and conviction.
Best Thematic Funds vs Best Sector Funds
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Best thematic funds usually ride on long-term structural changes—like digital growth, renewable energy, or consumption. These themes often span 5–10 years.
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Best sector funds are more tactical bets, such as banking during rising interest rates, or pharma during healthcare booms.
Sectoral Funds vs Thematic Funds Returns
When comparing sectoral funds vs thematic funds returns, keep in mind:
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Sector funds can deliver extremely high short-term returns if the sector is booming (e.g., IT in early 2000s, pharma in 2020).
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Thematic funds usually deliver more balanced but slightly lower returns, as they are not entirely dependent on one industry.
Risks of Thematic Funds vs Sector Funds
Both carry risks:
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Risks of thematic funds: If the chosen theme underperforms due to policy changes, demand slowdown, or global disruptions, the fund may suffer.
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Risks of sector funds: Extremely concentrated risk; a downturn in the chosen sector can cause deep losses.
In short, thematic funds spread risk across multiple industries, while sector funds put “all eggs in one basket.”
Sector Funds vs Thematic Funds Performance Comparison
Looking at historical data, sector funds often outperform in short bursts, but thematic funds provide steadier performance over medium to long terms. A performance comparison suggests:
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Sector funds are better for investors with high conviction in one industry.
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Thematic funds suit those who want to participate in a broader story with relative diversification.
Thematic and Sectoral Funds Investment Strategy
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When to invest in sector funds? If you can identify a sector likely to outperform in the short term (e.g., banking in a credit upcycle).
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When to invest in thematic funds? If you believe in a long-term megatrend (e.g., digital economy, renewable energy).
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Investment horizon: Sector funds require timing; thematic funds require patience.
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Always allocate only a small portion (5–10%) of your portfolio to these high-risk categories.
Final Verdict: Thematic vs Sector Funds—Which Is Better?
There is no one-size-fits-all answer.
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If you want higher risk, higher reward, and have strong sector knowledge, sector funds may work.
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If you want theme-driven growth with some diversification, thematic funds are better.
Ultimately, the choice between thematic funds vs sector funds depends on your risk profile, investment horizon, and market outlook.
Pro Tip: Don’t put your entire portfolio into thematic or sector funds. Use them as “satellite investments” alongside diversified equity funds to enhance returns without taking excessive risks.