Diversify your portfolio with thematic funds

When it comes to equities, investors usually think of diversified equity funds. These funds invest across industry sectors and diversify stock or sector specific risks. As such, diversified equity funds are suitable for long term goal planning. Diversified equity funds are suitable for both new and seasoned investors. As per AMFI July 2025 data, more than 85% of active equity assets under management (AUM) are in diversified equity funds (source: AMFI). However, in recent years, sectoral and thematic funds have been catching the fancy of investors. In last 5 years, AUM of sectoral / thematic funds have multiplied 8X (source: AMFI, as on 31^st July 2025). While thematic funds can be volatile, it can boost your portfolio returns over long investment horizons. In this article, we will discuss thematic funds.

Core and satellite allocations

Financial advisors often recommend core and satellite strategy for building your investment portfolios. The objective of your core portfolio is to achieve your long-term financial goals. Your core portfolio should comprise primarily of diversified equity funds or hybrid funds. To supplement your core portfolio, you can build a satellite portfolio comprising of thematic / sectoral funds. The satellite allocations can boost your portfolio returns and enhance wealth creation.

How can thematic / sectoral funds boost portfolio return?

• The chart below shows the calendar year returns of various thematic / sectoral indices versus the broad market index Nifty 500 TRI (see the graphic below).
  
  

  

  Source: National Stock Exchange, Advisorkhoj, as on 18^th August 2025

  
  

  You can see that different sectors outperformed the broad market index in different years. For example, in 2025 YTD, sectors like Defense, Banks, Metals etc. have been outperforming the broad market index.

  Disclaimer: Above chart / graph is purely for investor education purposes to illustrate the concept of sector rotation in different market phases. This should not be construed as investment or scheme recommendation. Past performance may or may not be sustained in the future.



• In the last 10 years, Nifty 500 TRI gave less than 10% returns in 5 years (see chart above). In those years, tactical exposure or satellite allocations to certain themes or sectors could have boosted portfolio returns.


• The broad market comprises of both growth and defensive stocks. As such the performance of the broad market index will combine the performance of both growth and defensive stocks. Some industry sectors or growth themes on the other hand, has the potential to outperform the broad market index even in the long term (see the chart below).
  
  

  

  Source: National Stock Exchange, Bloomberg, Advisorkhoj, as of 18^th August 2025

  Disclaimer: Above chart / graph is purely for investor education purposes to illustrate how growth themes / sectors perform versus broad market. This should not be construed as investment or scheme recommendation. Past performance may or may not be sustained in the future.

Sectoral funds versus thematic funds

Sectoral funds invest in a particular industry sector like Financial Services, FMCG, Pharma, Technology etc. Thematic funds invest in a theme, which are macro trends encompassing several industry sectors. For example, the investment theme, consumption, may include FMCG, Consumer Durables, Automobiles, consumer services, travel, and hospitality etc. Healthcare, as an investment theme, can include Pharma, Hospitals, Diagnostic Centres, Health Insurance etc. Investment themes are broader and easier to understand compared to sectors.

Thematic funds provide more diversification than sectoral funds. On the other hand, in certain sector rotation, specific sectors can outperform the theme, even though sectors are part of the theme. If you have knowledge of industry sectors and think that specific sectors can outperform in the medium to long term, you can invest in sectoral funds. If you do not have knowledge of specific sectors, then thematic funds may be more suitable investment options for you. You should invest according to your risk appetite and consult your financial advisor or mutual fund distributors if you need help in making investment decisions.

Debunking some myths

• Thematic investing requires timing the market - This is not true if you have long investment horizon. Several investment themes like consumption, manufacturing etc are long term secular growth themes. Market timing is not required if you are investing in a long term growth themes. You need to have long investment horizon.


• Investing in thematic funds which have given the highest short term returns - Markets are cyclical and so are sectors. A top performing sector may not remain top performing in the future. An underperforming sector may not remain underperforming forever. You need to have a clear investment strategy of how a fund fits into your portfolio and should always have long investment horizon.


• Book profits in outperforming thematic funds - This is short term investing mentality and may harm your financial interests in the long. When you book profits when prices are up, you do not give your investment the opportunity to compound. As mentioned earlier, thematic funds are long term investments, just like diversified equity funds.


• Thematic funds are for lump sum investments - This is not correct. You can invest in thematic funds through Systematic Investment Plan (SIP) over long investment horizon and create wealth through the power of compounding.

Conclusion

In this article, we have discussed how investors should diversify their portfolio by exposure to thematic funds and how these funds may help you in wealth creation in the long run. How much exposure should you have in thematic funds in your overall equity investment portfolio? As a thumb rule, many financial advisors recommend 80% allocation to core portfolio and 20% allocation to satellite portfolio (comprising of thematic funds). If you have higher risk appetite you can increase your satellite allocations. Investors should consult with the financial advisors or mutual fund distributors how they can build a satellite portfolio with thematic funds.