Understanding The Key Difference Between Sectoral and Thematic Funds

17 June, 2025

Synopsis:

• Sectoral funds invest only in one sector, like banking or pharma, so they carry higher risk but can give good returns if that sector performs well. They suit experienced investors who can understand market cycles.

• Thematic funds invest across different sectors that follow a common idea, like digitalisation or ESG. This gives them more diversification and slightly lower risk than sectoral funds.

• If you want to invest in a single sector, go for sectoral funds. But if you believe in a long-term theme and want better balance, thematic funds are a smarter choice.

Think of mutual fund investing as managing a project. If you put all your efforts into just one department, such as marketing, you are making a focused choice. This is similar to a sectoral fund. But if you involve marketing, technology, and operations to achieve a common objective, that reflects a thematic fund.

Sectoral and thematic funds often confuse investors due to their overlapping nature. However, understanding their core difference is crucial for building a focused yet risk-conscious mutual fund portfolio that matches your long-term objectives.

What Are Sectoral and Thematic Funds? 

Though both types of funds follow a focused investing strategy, they differ in their approach:

1. Sectoral Funds

Sectoral funds invest exclusively in companies within a specific sector, like banking, IT, pharma or FMCG. Their performance is heavily linked to how that sector performs. For example, a Banking Sector Fund will only hold stocks of banks and related financial institutions. These funds are ideal for seasoned investors who can time market cycles and understand sector-specific trends. However, investors should also remember that these funds come with high concentration risk, especially during sectoral downturns.

2. Thematic Funds 

Thematic funds take a broader approach. Instead of investing in a single sector, they invest across multiple sectors that align with a common theme or megatrend. For instance, a Digital India Fund may include IT, telecom, fintech, and e-commerce companies, all contributing to the digitalisation theme.

This allows thematic funds to diversify their holdings better than sectoral funds, reducing the intensity of risk while still maintaining a focused strategy.

Key Differences Between Sectoral and Thematic Funds

We can differentiate sectoral funds and thematic funds with the help of the following points, as written below:

How Should Investors Choose Between Them?

The choice between sectoral and thematic funds depends on your investment outlook and risk appetite:

• If you have sector-specific knowledge and are comfortable with short to medium-term volatility, sectoral funds may work.

• If you are bullish on a long-term theme (e.g., renewable energy or digital transformation) but want some level of diversification, thematic funds will be more appropriate.
  

Sectoral and thematic funds offer high-growth potential but with different levels of risk and concentration. Knowing the distinction helps you avoid overexposure and align your portfolio with your financial objectives. With the right knowledge and planning, these funds can become a powerful addition to a well-balanced mutual fund strategy.

Start exploring sectoral and thematic mutual funds with confidence. Use the HDFC Bank SmartWealth App to discover expert-backed investment options that align with your objectives and help you build long-term wealth.

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