Are thematic and sectoral funds worth the risk?

thematic funds can provide targeted exposure to long-term structural trends that may not be adequately captured by diversified equity portfolios. In the right market environment, a well-timed sectoral allocation can enhance portfolio returns.However, experts caution that such gains come with elevated risks.

Sectoral funds are inherently more volatile because of their concentrated exposure. “Leadership in sectors can change quickly,” said Vishal Dhawan, founder and chief executive officer of Plan Ahead Wealth Advisors.This volatility has been evident in recent years.

The Nifty Realty Index delivered stellar returns of 81% in 2023 and 34% in 2024, only to decline more than 16% in 2025. Auto and metal stocks have also seen sharp swings, underscoring how quickly sector cycles can turn.Given these risks, advisors recommend using sectoral and thematic funds only as part of a satellite allocation, rather than forming the core of an investment portfolio.Timing also plays a critical role in sector investing.

“Sectors and themes are cyclical and carry significant timing risk, both at entry and exit,” said Kaustubh Belapurkar, director, manager research at Morningstar Investment Research India. Phased investing can help mitigate this risk by spreading investments across market conditions rather than committing capital at a single point.For investors unsure about identifying the right sectors or managing volatility, diversified equity funds are a better option.

These allow fund managers to take calibrated sector overweights and underweights without exposing investors to extreme concentration risk. First-time and less experienced investors, experts say, should generally avoid narrow sectoral bets.Even for seasoned investors,