Thematic and sector-focused mutual funds have witnessed a remarkable rise in India in recent years, driven by the evolving investor landscape, government initiatives, and the desire to capitalize on specific high-growth sectors. 

Let us delve deeper into the reasons behind this surge, the characteristics of these funds, recent trends, and performance insights based on the latest data from 2024 to 2025.

Thematic mutual funds are equity mutual funds that invest based on a specific theme or idea, spanning multiple sectors. For example, a green energy theme-based mutual fund may invest in companies involved in solar power, wind energy, and electric vehicles. Sectoral funds, on the other hand, focus their investments within a single sector, such as banking, technology, energy, or pharmaceuticals.

While both types concentrate investments more than diversified equity funds, thematic funds have a broader scope, linked by an overall theme. In contrast, sectoral mutual funds narrowly focus on a single sector. These funds typically invest a minimum of 80% of their assets in the chosen theme or industry as mandated by SEBI regulations.

The popularity of thematic and sectoral funds has increased significantly in India. According to Business Today, net inflows into these funds soared by over 200% in FY25 (April 2024 to February 2025), reaching Rs 1.46 lakh crore compared to Rs 46,138 crore in FY24. Several factors fuel this growth:

• Government Initiatives: Programs like ‘Make in India,’ Production-Linked Incentive (PLI) schemes, and ‘Viksit Bharat’ have increased investor interest in sectors such as manufacturing, defense, and public sector undertakings (PSUs).
• Structural Growth Themes: The increasing awareness of long-term trends, such as digital transformation, renewable energy, healthcare innovation, and infrastructure development, has made thematic funds attractive to investors seeking to align their portfolios with these themes.
• New Fund Offers (NFOs): The calendar year 2024 saw around 52 NFOs launched in the sectoral/thematic category, raising Rs 79,109 crore, indicating robust fund house activity and investor appetite.

Recent data reveals shifting sectoral allocations within focused funds. AUM has grown from approximately Rs 84,000 crore (103 schemes) in Dec 2020 to Rs 4,60,000 crore (approx 190 schemes) in Dec 2024.

Thematic mutual funds in India have also mirrored broader market themes such as green energy, infrastructure, technology, and healthcare, which have experienced rapid growth due to technological advances, the advent of AI, favorable policies, and global demand.

Sectoral funds in India have delivered impressive returns, particularly in the infrastructure and pharmaceutical sectors. For instance, the infrastructure category posted a 47.67% growth over the past year, while the pharma sector showed a 35.57% one-year return and a 28% five-year CAGR. Leading sectoral funds, investments such as the Quant Infrastructure Fund and ICICI Prudential Infrastructure Fund, have delivered higher-than-average 5-year CAGRs, underscoring the potential for high returns in focused investments.

However, these funds also carry higher risk due to concentrated portfolios. While they can outperform when their sectors do well, they are more vulnerable during market downturns or sector-specific challenges.

• Targeted Exposure: Investors can capitalize on high-growth sectors or themes that align with their market outlook or personal beliefs. 
• Diversification Within Themes: Although concentrated, these funds still spread investments across multiple companies within the chosen theme or sector, reducing single-stock risk.
• Alignment with Government Policies: Funds focusing on sectors that benefit from government reforms and incentives offer an opportunity to participate in India’s structural growth story.
• Potential for Superior Returns: Historical data show that sectoral or thematic funds can outperform broader market indices when their focused sectors thrive.

Investors should be aware of the higher volatility and risk associated with these funds, given their concentrated nature. Market cycles, regulatory changes, sectoral unrest, and global economic factors can significantly impact sector performance. For example, recent import tariff hikes in the U.S. could impact Indian sectors such as textiles, pharmaceuticals, and IT services, potentially influencing fund returns.

Therefore, these funds are best suited for investors with a high-risk appetite, a long-term investment horizon, and a clear understanding of the sector or theme dynamics.

The rise of thematic mutual funds and sector-focused funds in India reflects a maturing investment landscape where investors seek to leverage specific growth opportunities beyond traditional diversified funds. Supported by strong inflows, government initiatives, and robust sectoral performance, these funds offer an exciting avenue for portfolio diversification and potential superior returns.

However, the concentrated nature of the strategy demands careful selection, market expertise, risk awareness, and alignment with one’s investment goals. As India’s economy continues to evolve, thematic and sectoral funds are poised to remain a significant part of the mutual fund ecosystem, empowering investors to participate in the country’s dynamic growth sectors.