What Are Sectoral or Thematic Mutual Funds? Should You Invest Or Not?

While investing in mutual funds, one chooses his/her favorite large cap, mid cap, small cap and multi cap equity funds but building a diversified portfolio don’t end here. But we are not going to discuss about diversification, but will discuss about sectoral or thematic mutual funds.

So basically, thematic or sectoral funds allows to invest in different sectors of the economy. With sectoral or thematic funds the investors can invest in,

  • Financial Sector
  • Healthcare Sector
  • IT Sector
  • Infrastructure Sector
  • Consumption & Demand
  • Real Estate
  • Gold

I might have missed some, but these are the sectors one can invest if wants to. But before you make your decision on investment in a hurry, I suggest to read some points I’ve written about these funds. I believe below points can help understanding the thematic or sectoral funds in details. So let’s begin.

(Sometimes) Half of portfolio will depend on 5-7 stocks

Look, sectoral or thematic funds have to choose stocks within the theme or sector and that boundary makes fund managers allocate half of money in 5 to 7 stocks.

Here’s screenshot of ICICI Prudential Technology fund,

As you can look above, 43.54% money invested will go into these 5 stocks.

Note: all the information is given for educational purposes, we don’t recommend to buy or avoid any fund.


Super volatile funds

As you read above, half of the portfolio depends on 5-7 stocks and when this type of allocation tends to be volatile.


High Risk, High Reward Possiblity

Well, having high exposure to fewer stocks wasn’t a bad thing too. If the whole theme or sector perfumes, these funds can outperform that.

If you’re lucky enough to time the market, you can have high returns but you need to know when to exit as well.


Proper knowledge of sector/theme

It doesn’t matter in which field you’re working or studied. One can work in IT company, but can have knowledge about financial markets.

Having proper knowledge helps investors the decode news & rumors and connect dots.

It doesn’t make sense to investing without having proper knowledge.


Growth visibility

Before investing, one should have an optimistic view on theme or sector.

One should figure out the theme or sector he/she can grow or not.

For example, IT has outperformed in last three years while infrastructure funds are still having 2-3 percent negative returns even when nifty is at 14,000 points!


Sectoral crisis is possiblity.

I hope you know about NBFC crisis that came in 2019.

Well a crisis can come in any sector. And as you know thematic/sectoral fund mostly have high exposure in fewer stocks and this can bleed your portfolio if you’re invested.

The investors will have two option at that time,

  • Wait till the crisis gets solved
  • Book losses and move out

Portfolio allocation

Well, ask any expert and he/she will suggest to have only 5-15% of thematic or sectoral fund’s allocation in the portfolio.


Your Should Have Courage To See Losses

That’s the last thing I want to clear our. As I said before, infrastructure has given negative returns of 2-3% in the last three years even after the nifty touching 14,000 mark. Imagine, you’ve invested in a mutual fund which is not performing while markets are outperforming. Imagine, getting 0 returns after parking money in a fund for 3 years!

Well, that can be worse that that. Any theme or sector can have negative growth as well. One should be prepared for that.