We will discuss whether sectoral and thematic mutual funds deserve your attention or are simply overhyped.

The story

Equity Mutual Funds saw net inflows of ₹1.71 lakh crores from April to August this year. Out of which, nearly 50% has been pumped into Sectoral/Thematic Mutual Funds. This category of funds boasts the highest Assets Under Management (AUM) as well as the highest number of schemes out of all equity fund categories.

Thematic funds

For the uninitiated, a thematic or sectoral mutual fund invests in companies based on a specific theme or sector like technology, defense, manufacturing, etc. These funds focus on one particular trend or sector rather than a broader market.

Every mutual fund company is launching a new fund for every hot sector. And it’s quite evident from the numbers that investors are jumping on these funds. The question is, do you need a thematic fund in your investment portfolio? Let me tell you.

There are 3 key aspects to understand

  • Sector performance is cyclical
    Sectors perform differently through economic cycles, with some leading and others lagging at different times.
  • Requires timing & expertise
    Investing in cyclical sectors requires precise timing and in-depth analysis, which is difficult for most retail investors.
  • Suitability & risks
    Thematic and sectoral funds focus on single sectors and are best for active investors who can forecast trends. Mistimed investments can result in significant losses.

Every mutual fund company is launching a new fund for every hot sector. And it’s quite evident from the numbers that investors are jumping on these funds. The question is, do you need a thematic fund in your investment portfolio? Let me tell you.

To conclude

The whole point of investing in mutual funds is to diversify your investment into a broader market. However, when you invest in these funds, it concentrates your investment in just one sector.

A sector that performs well today may not continue to do so, making a buy-and-hold approach less effective. These funds might deliver unusually high returns for the short term, but ideally, they should not be a significant proportion of your portfolio.