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Mutual funds that aim at investing in a specific sector are called Sectoral funds. These funds invest only in businesses that operate in a particular sector or industry. For instance, a sector fund may invest in sectors like Banking, Pharma, Construction, or FMCG sectors, among many others.
On the other hand, Thematic funds are the ones that invest in stocks based on a particular theme. The theme chosen by such funds may revolve around areas such as rural consumption, commodity, defense, etc. For instance, a thematic fund may focus on rural consumption and invest in funds of all sectors that favor this theme.
The major difference between both these funds is that Sectoral funds invest in only one sector, whereas Thematic funds invest across multiple sectors that are woven around a common theme.
Difference Between Sectoral and Thematic Funds
Mentioned below are a few major differences between both the type of funds-
| Parameter | Sectoral Funds | Thematic Funds |
| Investment area | Invest in specific sectors | Invest across multiple sectors around one theme |
| Risk Involved | Very high | Moderately high |
| Returns Offered | High | High |
| Volatility | High | High |
| Investment Horizon | 3 to 5 years | 5 to 7 years |
| Diversification | No diversification offered | Little diversification between the sectors is offered |
| Suitability | Investors who have in-depth knowledge of the specific sector | Investors who have in-depth knowledge of a specific theme that the fund invests in |
| Asset Allocation | 80% of the assets to be allocated to the specified sector | 80% of total assets to be allocated to sectors of the specified theme |
Also Read: What are Sectoral and Thematic Funds
What are Sectoral Funds
Sectoral funds are known to invest only in specific sectors such as Pharma, Construction, FMCG, etc. According to the guidelines laid down by SEBI, sectoral funds are bound to invest a minimum of 80% of their assets in the specified sectors. The remaining 20% can be allocated to other debt or hybrid securities.
- Sectoral funds may come in different types, varying in market capitalizations, investment objectives and set of securities
- These funds can invest in multiple sectors namely, natural resources, utilities, real estate, finance, health care, technology, communication, refined metals
- Some sector funds also focus on sub categories such as banking
- These funds aim to provide exposure to certain specific sectors that otherwise lack investors’ attention in terms of market sharing
- Sector funds are ideally meant for active and educated investors who often analyze the macro-economic situation of multiple sectors
- These funds are capable of beating the market returns along with offering a high-reward ratio
What are Thematic Funds
Thematic funds are those that invest in stocks based on a particular theme. These funds invest across sectors that follow a specific theme. According to SEBI’s guidelines, thematic funds must invest 80% of their assets in stocks of a particular theme, across different sectors.
- In terms of the number of stocks and portfolio construction, thematic funds are equally diversified as equity schemes
- Thematic funds invest in sectors of varied themes such as multi-sector, international exposure, export-oriented, rural India, etc.
- These funds are considered riskier than diversified equity funds or large cap equity funds
- Investors of thematic funds must take a minimum of 5 years’ time to enter and exit the scheme and allow the funds to perform positively
- It is suggested that only investors with a moderately high risk-taking ability should consider investing in thematic funds
Top 5 Sectoral Funds to Invest in 2020
| Fund Name | AUM
(In Crore) |
3-Year Returns
(In %) |
5-Year returns
(In %) |
| L&T Infrastructure | 1,644 | 3.47 | 6.52 |
| SBI Banking & Financial Services Dir | 1,490 | 18.55 | – |
| Franklin Build India | 1,208 | 4.22 | 6.92 |
| DSP T.I.G.E.R | 1,052 | 3.24 | 4.18 |
| SBI Infrastructure Dir | 496 | 5.13 | 5.95 |
*Data as on 2 March 2020; Source: Value Research
**The above list has been created on the basis of the Net Asset value of these funds
Top 5 Thematic Funds to Invest in 2020
Depending upon their assets under management, given below is a list of top 5 thematic funds that you may consider investing in this year-
| Fund Name | AUM
(In Crore) |
3-Year Returns
(In %) |
5-Year returns
(In %) |
| ABSL MNC Dir | 3,918 | 10.88 | 7.82 |
| SBI Magnum Global Fund Dir | 3,748 | 8.92 | 6.73 |
| SBI Magnum Equity ESG Dir | 2,735 | 9.95 | 7.75 |
| UTI Dividend Yield | 2,333 | 6.01 | 4.81 |
| ICICI Prudential India Opportunities Dir | 2,196 | – | – |
*Data as on 2 March 2020; Source: Value Research
**The above list has been created on the basis of the Net Asset value of these funds
Points to be Considered
- It must be noted that both sectoral and thematic funds are highly risky funds to be considered as investment options by amateur investors
- Professionals suggest that considering the level of volatility, each of these funds should not constitute more than 5-10% of your portfolio
- While investing, you must keep your portfolio diversified across multiple large cap and mid cap funds, along with sectoral and thematic
- Since both these funds depend on the performance of sectors (individually or otherwise), there are high chances that your portfolio will face fluctuations in both, bullish and bearish markets
- Investments in sectoral and thematic funds are clearly suitable only for investors who are active and have a clear understanding of the market and macroeconomic conditions
- Being cyclical in nature, you must carefully keep a check on the entry and exit timing of these funds, sectoral funds to be specific
- It is advised that before investing in any of these funds, you take a look at the upcoming opportunities rather than looking at the theme’s or sector’s past performance
