The advantage of diversification notwithstanding, a focused approach to specific sectors and/or themes can prove to be rewarding for investors who are well-informed and ready to take the associated high risk. Such investors should invest in sectoral or thematic mutual funds. First, let’s distinguish between the two.
Sectoral funds invest in a specific sector as defined by their investment objective. For instance, banking funds invest in banking stocks, pharma in pharma stocks, and so on. Performance of these funds is linked to the underlying sectors.
Thematic funds invest across sectors related to a common theme. For instance, infrastructure-oriented funds aim for capital appreciation by investing in companies involved in infrastructure-related activities. To meet the objective, these funds invest in sectors such as banking, cement and construction projects. Thematic funds are more diversified than sectoral funds