Thematic and sectoral mutual funds collected over ₹15,000 crore per month through much of 2025 — the highest on record. Defence, infrastructure, manufacturing, and consumption themes attracted the bulk of flows. Yet historical data shows that the majority of investors in sectoral funds underperform the Nifty 50 over 5-year periods. The disconnect is not accidental.
How sectoral funds work against most investors
Sectoral funds concentrate in one industry vertical, amplifying both gains and losses. The problem is timing: peak inflows into a sector almost always coincide with peak valuations.
- The IT sectoral fund inflow peaked in late 2021 — just before the Nifty IT index corrected 40%.
- PSU and defence fund inflows surged in mid-2024 — those funds are down 25-35% from those highs.
This pattern repeats because human attention is drawn to what has already performed. By the time a sector is prominent enough to appear in headlines and AMC marketing material, the easy money has already been made.
When sectoral funds make sense
Thematic funds are not inherently bad. They can work when:
1. You have a conviction built on fundamental research, not recent returns. If you understand why a sector should outperform over 7-10 years and can hold through a 30-40% drawdown, concentrated exposure has a rational basis. 2. You are using them as a satellite allocation. A 10-15% allocation to a high-conviction theme within a diversified core portfolio is very different from making a sectoral fund your primary investment. 3. The valuation is reasonable. Entering a sector at 30x earnings when the broader market trades at 20x is a very different bet than entering at 15x.
Questions to ask before buying a thematic fund
- What is the PE/PB of the underlying sector vs. historical average?
- How much has the fund's NAV already risen before you invest?
- Can you hold this for 7+ years through underperformance?
- What % of your total equity portfolio would this represent?
Conclusion
For most investors, a well-diversified flexicap or index fund will outperform a sectoral fund on a risk-adjusted basis over a full market cycle. Thematic funds require genuine conviction, long time horizons, and stomach for concentrated volatility — qualities that are rarer than their inflow numbers suggest.