What are sectoral and thematic funds, and which one should you buy?

What sectoral and thematic funds are all about, and the ones performing best this year.

What are sectoral and thematic funds, and which one should you buy

Sectoral and thematic funds are both types of equity mutual funds available to investors. In the case of sector funds, investment is made in stocks belonging to a particular industry or sector. Thematic funds can invest in different sectors or industries but such industries are often connected by a common theme. 

For instance, Franklin India Opportunities Direct Growth Fund is a thematic fund that has a holding in varied companies such as HDFC Bank, Bosch, HCL, Asian Paints, Mahindra & Mahindra, etc. A technology sector fund, on the other hand, could have investments in Infosys, TCS, HCL, and similar tech companies. Sector allocation of mutual funds are more specific to the industry, like IT, power, and energy stocks.

Key features of sectoral funds

Sectoral equity funds try to take advantage of the growth in a particular industry. Sectoral market patterns are unique, and investment in the right sector can provide returns that are much higher than market returns. Investments in a sector can generate a high yield if the investor can enter the market at the right time. Sectoral yields are generally cyclical. For instance, an investment in the pharma sector can be a wise decision, considering the global health crisis at hand.

Sectoral funds are also considered risky as the risk is not diversified across different sectors. Experienced investors with knowledge of the right entry and exit times are best suited for sectoral fund investments.

Related: How to choose an equity mutual fund

Key features of thematic funds

Thematic funds have a semi-diversified portfolio. These funds invest in multiple sectors that are connected by a common theme, so they offer more diversity compared to sectoral funds. These funds too can reap good returns from the market if properly planned and invested. But it is more difficult to select assets under a thematic fund. Investing in sector funds is much easier as you know which sector to select from.

Thematic funds are considered to be high-risk as well. There is a possibility that many or most of the companies with the underlying theme may fare poorly during a bad spell in the market. Thematic funds are ideal for investors with a high risk appetite and a good understanding of the market.

Thematic mutual funds are known to deliver good long-term returns. They try to identify emerging trends in the market and invest in them. Therefore, investors who are seasoned enough to identify promising trends can rely on thematic funds as a long-term investment.

Related: What are thematic funds?

How to invest in sectoral and thematic funds

Most mutual fund companies have a list of sectoral and thematic funds that they offer to customers. If, for instance, you are looking for a dividend-yielding thematic fund or a sectoral fund in pharma stocks, you will find such options in one or more of the various mutual fund companies. Once you select the thematic or sectoral fund of your choice, you have to enter the investment amount and carry out the other common fund account opening formalities.

The actual process of investment can be done online as well as offline. To open a sectoral or thematic fund offline, you could contact a broker of your choice and request the fund options available. Through the broker, you will also be able to find out the various expenses and charges related to the investment. To invest in these funds, you will need to furnish ID proof, cancelled cheque, photograph, PAN, and KYC documents to the broker.

For online purchase of sectoral or thematic mutual fund investments, you have to visit the website of the broker or Asset Management Company (AMC) of your choice or aggregator websites. With the latter, you can compare funds across different companies and/or buy through them.

Related: Equity Mutual Funds vs Stocks: Where to invest?

Taxability of sectoral and thematic funds

If the fund units are sold within a year of the date of allotment, the capital gains will be taxed at 15%. If the unit sold has been held for more than one year, the gain made from it will be classified as long-term capital gains. LTCG of up to Rs 1 lakh in a financial year is not taxable. Gains beyond Rs 1 lakh attract income tax of 10%.

Best sectoral and thematic funds

Some of the best-performing sectoral funds include: 

  • ICICI Prudential Technology – 131% YTD (year-to-date) return on lump sum
  • Aditya Birla Sun Life Digital India – 112% YTD return on lump sum
  • Tata Digital India – 111% YTD return on lump sum
  • Franklin India Technology – 89% YTD return on lump sum
  • SBI Technology Opportunities – 88% YTD return on lump sum

Some of the best performing thematic funds include: 

  • SBI Magnum COMMA Fund – 87% YTD return on lump sum
  • Franklin India Opportunities – 72% YTD return on lump sum
  • Aditya Birla Sun Life International Equity Plan B – 63% YTD return on lump sum
  • Tata Ethical Fund – 56% YTD return on lump sum
  • Nippon India Quant Fund – 51% YTD return on lump sum

Related: Different types of funds available under mutual funds

Last words

Please note that investments in these – or any sectoral or thematic funds for that matter – can vary in terms of returns according to changes in market conditions. If you plan to invest in sectoral or thematic funds, it is recommended that you choose your funds carefully and regularly review their progress. Read this to know more about equity funds.

Disclaimer: This article is intended for general information purposes only and should not be construed as investment or tax or legal advice. You should separately obtain independent advice when making decisions in these areas. 




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