Sectoral and thematic mutual funds have grown in popularity among investors in recent times, leading to more fund houses launching such plans. Currently, there are more than 200 such funds in the market, and Asset Management Companies added over 50 sectoral/thematic funds in the last financial year. Of late, we have seen strong returns in themes like PSU, infrastructure, and defence. In this story, we discuss whether it would be wise to invest in SIPs in these hot sectors/themes.
As mentioned above, Indian investors are increasingly getting attracted to this category, and it has now become the largest AUM segment in the mutual fund industry.
Sectoral/thematic funds hit record AUM, 222% increase in 3 years
According to the latest AMFI data, the AUM of sectoral and thematic funds rose to ₹5,13,469 crore in September 2025, marking a 1.4% increase compared to August 2025. The category’s AUM grew 12.8% in the past six months and expanded 9.9% over the past year.
The sharpest growth came over three years — AUM surged 222.8% from ₹1,59,076 crore in September 2022, clearly indicating rising investor interest.
Why are fund houses launching so many new thematic-sector funds?
In FY25, 52 new funds were launched in this category, compared to 37 in FY24. Currently, there are more than 211 funds in this space.
According to experts, this growth is not just due to investor interest. In 2017, India’s capital market watchdog SEBI had introduced a rule that an AMC can launch only one fund in a category (large cap, small cap, flexi cap, etc.).
However, there are no such restrictions for sectoral and thematic funds. This allows fund houses to easily launch new funds based on new themes —such as defence, tourism, consumption, manufacturing, etc.
High returns have boosted investor enthusiasm
In the last one year, when equity markets fought intense volatility on multiple fronts, many themes outperformed even categories like small-cap, mid-cap and large-cap. Sectors like banking and auto & transportation have emerged as top gainers – with up to 11.5% growth in 1 year. No other category has managed to clock an average growth in double digits during the period.
If we talk about thematic funds, themes like consumption, innovation, ESG and Manufacturing have performed well in 1 year. The three-year return chart is completely dominated by thematic funds.
Thematic funds: 3-year performance
Themes like PSU, Auto & Transportation and Infrastructure emerged as top runners on a 3-year return chart among the 25 sub-categories within the equity space, according to Value Research.
Many investors see sectoral and thematic funds as the same, but there is a slight difference between them. According to the Association of Mutual Funds in India (AMFI), here is how they are defined:
According to AMFI, sectoral funds concentrate their investments in a single industry or sector, such as banking, tech or pharma. Thematic funds, however, invest across multiple sectors connected by a broader macro-level theme or trend. Examples are “Consumption,” which may include companies in FMCG, consumer durables, and automobiles. ESG, MNC, Innovation, Digital, etc. are some of the trends gaining popularity these days.
Strong rise of sectoral/thematic sub-categories in 3 to 5 years
Seeing such strong gains, especially post-pandemic, in themes like PSU, Infrastructure, Auto & Transportation and Manufacturing, many investors believe that investing in these sectors over a long period through SIPs can maximise returns.
Top 5 sectoral/thematic funds based on SIP returns in 5 years
Among the best 5 sectoral/thematic funds in the last 5 years are mostly from infra space, generating up to 28% CAGR (compounded annual growth rate). ICICI Prudential Infrastructure Fund leads the chart of such funds, with 28% annualised return in 5 years.
Though the gains in 3 and 5 years are impeccable but experts warn that the real picture for these funds is more complex than this.
Do SIPs in such funds reduce risk?
Sectoral and thematic funds are completely dependent on market cycles. When the theme is in play, returns are strong. But when the cycle breaks, these funds tend to underperform for years. SIPs provide discipline to the investor, but they don’t mitigate cyclical risk.
It’s also possible that investors continue to buy units for a long time, but the theme itself weakens.
The risk of investing too much in a single story
Unlike diversified equity funds, sectoral/thematic funds invest 70–80% of their money in a single sector or theme. If a sector finds that government policy changes or global demand decreases or orders stop or the economic environment deteriorates, the entire portfolio can be affected.
But, on the flip side (and this we have observed in the last 3-5 years), if the right theme is identified and it gets the support needed, SIPs in such funds can yield great returns in both short and long terms.
Some sectors or themes even become long-term mega-cycles — such as PSU turnarounds, massive government spending on infrastructure, defense manufacturing, technology, and green energy.
If investors are patient and have a time horizon of 7–10 years, SIPs can accumulate good units in these themes, and when the sector moves, they generate strong returns.
Who should undertake such SIPs?
Experts believe that SIPs in sectoral/thematic funds should only be undertaken by:
Those who understand the market and the sector
Those who already have a strong core portfolio
Those who do not have an allocation of more than 5–10%
Those who can stay invested for the long term, i.e., 7–10 years
Those who can track policy and economic trends.
Conclusion
Sectoral and thematic funds have recently delivered impressive returns, and investor interest is growing. However, these funds carry significant risks. SIPs only provide discipline; they do not mitigate the fundamental risks of these funds — cyclical fluctuations and theme-focused investing.
These funds are suitable for investors who understand the theme and have the ability to withstand fluctuations. This category is not for beginner investors.