Mutual fund offer investments across sectors and industries. Each fund comes with an investment objective, and with a plethora of investment options, some funds choose to restrict themselves to a few segments in the market and are known as thematic and sector funds.
Mutual funds who invest across sectors related to a common theme like infrastructure, manufacturing or MNCs are keyed as thematic funds. When mutual funds focus on a particular sector and predominately invest in those, are known as sector funds. Thematic funds are a host of sector funds woven around a particular theme, let’s say, if a theme is built around infrastructure then fund managers would invest in companies related to construction, cement, steel etc.
Both thematic and sectoral funds are high-risk funds but a sectoral fund can get riskier as all your capital would be allocated to one particular sector, and if the sector outperforms you could earn a lot of money but if it underperforms you may end up losing all your capital. A thematic fund does invest in multiple sectors related to a particular theme, so if anyone sector underperforms, your risk is cushioned or diversified to other sectors. Both sector and thematic funds are risky compared to the broad market but diversity makes thematic funds less volatile compared to sector funds.
Risk-averse investors should stay away from both, however, if you have a healthy risk appetite you could invest in sector funds. But if you want to protect your capital you can invest in thematic funds to diversify your risk.Investing in a sector fund would mean putting all your eggs in one basket. So it is important to diversify your risk. Businesses follow a cyclical pattern of ups and downs, some sectors perform whereas some sectors falter during the same period. The aim of sector funds is to benefit from sectors that are performing well with the set investment objective of the scheme. Sometimes sectoral funds can seem very attractive as they can generate long-term return but it advised you have a well-diversified portfolio and you have a good understanding and in-depth knowledge of a particular sector or theme. You should also know the right time to exit when investing as the funds are cyclical in nature.