Sectoral and Thematic Funds: Know the Risk

A sectoral fund invests in a single sector — banking, pharma, technology, infrastructure. A thematic fund is slightly broader, following an idea such as consumption or manufacturing across sectors. Both are undiversified by design.

Why they dominate both ends of the table

Whichever sector has just run hard will occupy the top of any 1-year ranking, and it is the largest category on this site. The same concentration works in reverse: when the cycle turns, these funds fall further and stay down longer than a diversified fund.

The timing problem

Sector returns are cyclical, so you need to be roughly right about both entry and exit. Most investors buy after strong performance has already been delivered, which is structurally the worst moment. Past sector returns are a particularly poor guide to future ones.

A sensible approach

• Treat these as a satellite holding, not a core one — a modest share of the equity allocation.
• Have a reason beyond recent returns for choosing the sector.
• Remember a diversified fund already owns these sectors at market weight.