The Uncomfortable Truth
Why We Don't Push Sectoral Funds to 9 Out of 10 Clients
Sectoral and thematic funds — pharma, defence, PSU, infrastructure, "digital India," take your pick — tend to sell themselves. They ride a headline, a recent rally, a story that's easy to believe in. And they often carry distribution economics that are perfectly comparable to, sometimes better than, a plain diversified fund.
We recommend them to a small minority of our clients. Here's the actual reasoning, not the marketing version.
A diversified equity fund spreads risk across sectors on purpose — when one sector struggles, others can cushion the fall. A sectoral fund removes that cushion deliberately. You're not just betting that equities will do well; you're betting that one specific slice of the economy will outperform every other slice, over your holding period. That's a much narrower, much harder bet to get right — and it's a bet most people don't realise they're making until the sector's headline story goes quiet and the fund goes with it.
The most common way people end up in a sectoral fund isn't careful sector analysis. It's recent performance. A theme has already run up 40-60% over eighteen months, it's all over financial media, and the fund's most recent factsheet shows spectacular numbers — numbers that, by definition, describe the past, not what's coming next. Buying a hot sector after the run has usually already happened is one of the most reliable ways to buy high and, eventually, sell low.
We're not saying never. A sectoral or thematic fund can be a reasonable small satellite position — typically well under 10-15% of an equity portfolio — for an investor who already has a solid diversified core, genuinely understands the sector's cycle, and can emotionally tolerate that specific slice going to zero relative return for years without disturbing the rest of their plan. That's a specific, deliberate use case. It is not "my colleague made great returns in this fund last year."
If we recommended more thematic funds, in more portfolios, more often, our business would likely earn comparably well — sometimes better. We don't, because our actual job isn't finding you a fund with a good story. It's making sure the fund fits a plan built for your goals and your ability to stay invested through the years the story stops being told. A portfolio that looks exciting on a factsheet and falls apart the moment its sector cools off isn't a portfolio — it's a bet dressed up as a plan.
If you're already holding two or three sectoral funds and can't quite explain why beyond "it did well," that's worth an honest second look.
Atin Kumar Agrawal, Abundance Financial Services (ARN-251838), is an AMFI Registered Mutual Funds & SIF Distributor. This article is educational, not a recommendation for or against any specific scheme — book a free consultation to review whether your current allocation actually matches your plan.