Sectoral and Thematic funds — concentration risk

Sectoral and thematic funds are SEBI's high-conviction equity categories. Both are required to invest at least 80% of their assets in their declared sector or theme, giving the fund manager almost no diversification room.

Sectoral vs Thematic

• Sectoral: a single GICS-style sector — Banking & Financial Services, IT, Pharma, FMCG, Energy, Auto, Metals.
• Thematic: a cross-sector idea — Consumption (includes consumer staples, retail, leisure), Infrastructure (construction, capital goods, power), ESG, Manufacturing, PSU, India 4.0.

The difference is conceptual: a Banking fund holds only banks; a Consumption fund can hold an FMCG company plus a paint maker plus an apparel retailer plus a hotel chain.

The concentration trade-off

A diversified equity fund holding 60+ stocks across sectors absorbs single-sector shocks. A sectoral fund is the single-sector shock. The Indian Banking sector during the IL&FS / DHFL period (2018-19) is an example: banking funds drew down 30%+ while Nifty 50 was flat. Similarly, IT funds saw a 30% drawdown in 2022 while broad indices were less affected.

Conversely, sectoral funds top the leaderboard during sector rallies. The 2024 PSU rally lifted PSU-themed funds 50-70% in a year.

Long underperformance stretches

The behavioural challenge: out-of-favour sectors can underperform for 3-5+ years. Pharma underperformed for nearly a decade (2015-2021) before its 2023-24 recovery. Investors who bought "best pharma fund in 2014" and held through 2020 had a difficult experience even if the long-run pay-off eventually came.

Position sizing

For most portfolios, the recommended sectoral / thematic allocation is:

• 0-5% if you don't have a strong view.
• 5-15% as a satellite tilt around the diversified core, with deliberate entry and exit triggers.
• Avoid going much above 15% — you've taken on idiosyncratic risk most diversified investors don't.

Multi-sector or single-sector?

If you must take a sector tilt, thematic funds (multiple related sectors) tend to be safer than pure single-sector — the theme provides a small amount of internal diversification that single-sector funds lack.