Sectoral funds are the funds which invest 80 percent of the AUM in a particular sector as per SEBI guideline, and thematic funds are the funds which invest 80 percent of the AUM in a particular theme as per SEBI guideline. There could be several sectors in a theme.
To explain this with example – Quant Healthcare fund or DSP Healthcare fund are sectoral funds investing at least 80 percent of the AUM in Healthcare sector. Quant BFSI fund is a thematic fund investing at least 80 percent of it’s AUM in Banking, Financial Services and Insurance sectors. So, thematic funds are more diversified than sectoral funds.
Thematic funds can be categorized into 2 types based on sectors allowed for investments:
- In thematic funds like Quant BFSI fund, ICICI prudential manufacturing fund, etc, the fund manager is restricted to invest a large amount of money in few sectors as discussed above.
- There are other types of thematic funds which are not specific to few sectors, for example – Business Cycle funds. Business Cycle Fund does investment by rotation of sectors as per the analysis of fund manager. Similarly, India opportunities funds are not confined to few sectors. The option to have diversified portfolio is more than the thematic funds discussed in point 1.
How to understand if the fund is Sectoral fund, or thematic fund restricted to few Sectors, or thematic fund having flexibility to invest in all the sectors?
For this you can get into ET money app or website, and find benchmark for the fund getting into the scheme details of the fund. If the benchmark is BSE healthcare TRI, NIFTY Auto TRI, etc specific to a particular sector, it is Sectoral fund.
If the benchmark is NIFTY Financial Services TRI, Nifty India Manufacturing TRI, etc, which are combination of few sectors, the thematic fund is restricted to these sectors.
If the benchmark is NIFTY 500 TRI, Nifty 200 TRI etc, the thematic fund is not restricted to any sector.
Should you invest in Sectoral or Thematic Funds?
Thematic funds like business cycle funds, quantamental funds, India opportunities funds, etc having no restriction of sector/sectors needs to be considered for investment if the track record of the fund and/or fund manager is good.
For sectoral funds investing in one sector or thematic funds investing in few sectors, the investment can be done in below scenarios:
- You are an expert in a particular sector, and can decide on the entry and exit points of that sector.
- You are bullish on a particular sector or theme (combination of few sectors) that it will be one of the best performing sectors or themes in the upcoming decade. In this case, you can invest in the theme or sector for long term. Being bullish in this case should not be based on gut feeling but with proper analysis.