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How to Invest in SIP A Beginner's Guide
In summary
Sectoral mutual funds are equity schemes that focus on companies belonging to one particular sector, such as banking, technology, healthcare, or infrastructure. This focused exposure can increase both the impact of sector-specific opportunities and the risks affecting that industry.
- Sectoral funds must invest at least 80% of total assets in a particular sector.
- They can invest across companies of different market capitalisations.
- Concentration in one sector reduces diversification across industries.
- Sector performance can be affected by economic cycles, regulation, and industry-specific developments.
- The SEBI Riskometer helps you understand the scheme's assessed risk level.
- Equity-oriented mutual fund gains are subject to applicable Income Tax rules.
- Past performance does not indicate future returns.
The Bajaj Broking website provides access to 4,000+ mutual fund schemes, allowing you to compare different categories before investing.
What are sectoral mutual funds?
Sectoral mutual funds are equity schemes that invest predominantly in companies belonging to one particular sector of the economy.
For example, a banking sector fund focuses on banking companies, while a technology sector fund focuses on technology businesses. A healthcare fund may invest across pharmaceutical companies, hospitals, diagnostics, and other businesses within its defined sector.
Under SEBI's scheme categorisation framework, a sectoral fund must invest at least 80% of its total assets in equity and equity-related instruments of the specified sector. The remaining portion can be invested in permitted instruments according to the scheme's mandate and applicable regulations.
Because the portfolio is concentrated in one sector, the fund can be affected more strongly by developments within that industry than a diversified equity fund.
How do sectoral mutual funds work?
Like other equity mutual funds, sectoral funds pool money from multiple investors and use it to purchase securities according to the scheme's investment objective.
The key difference is the investment universe. A sectoral fund is restricted to a particular sector, although the companies within that sector can vary in size.
For example, a banking fund may hold large, mid, and small companies involved in banking, provided the investments comply with the scheme's mandate.
This means your returns are influenced not only by the individual companies held by the fund but also by the broader performance of the chosen sector.
What are the types of sectoral mutual funds?
Sectoral funds can focus on different parts of the economy. Common examples include:
Technology funds
These funds focus on companies involved in information technology, software, technology services, or related businesses.
Banking and financial funds
These funds focus on businesses such as banks and other financial-sector companies, depending on the scheme's mandate.
Healthcare and pharmaceutical funds
These funds invest in businesses such as pharmaceutical companies, hospitals, diagnostics, biotechnology, or medical-device companies, depending on the scheme.
Infrastructure funds
These funds focus on companies linked to infrastructure-related activities, which can include construction, engineering, capital goods, or related businesses.
FMCG funds
FMCG mutual funds focus on companies producing or selling fast-moving consumer goods, such as everyday household and personal-care products.
The exact portfolio of each fund depends on its scheme mandate, so two funds focusing on the same broad sector may still have different holdings.
What are the benefits of sectoral mutual funds?
Sectoral funds can serve a specific role in a portfolio when you want focused exposure to an industry.
Targeted sector exposure
You can gain exposure to several companies within a sector through one mutual fund rather than selecting individual shares yourself.
Potential to participate in sector growth
If the chosen sector experiences strong earnings growth or favourable structural developments, companies in that sector may benefit. However, strong sector performance is not guaranteed.
Diversification within the sector
A sectoral fund generally invests across multiple companies rather than relying on one stock. This reduces company-specific concentration compared with owning a single stock, although it does not remove sector-level concentration.
Professional management
An Asset Management Company (AMC) manages the scheme and makes investment decisions within its stated mandate. You can learn more about the role of an Asset Management Company to understand how fund management works.
What are the risks of sectoral mutual funds?
The main risk is concentration. A diversified fund can spread investments across several industries, while a sectoral fund remains focused on one sector.
Key risks include:
- Sector risk: Problems affecting the chosen industry can affect many holdings at the same time.
- Cyclical risk: Some sectors perform differently across economic cycles.
- Regulatory risk: Changes in government policies, regulations, taxation, or industry rules can affect companies.
- Valuation risk: A sector can become expensive relative to its earnings, increasing the risk of a decline if expectations are not met.
- Company-specific risk: Poor results, management issues, or operational problems at major holdings can affect the fund.
- Timing risk: Entering after a strong sector rally or exiting during a temporary downturn can affect your realised return.
The risk appetite you have for fluctuations should therefore be considered alongside the fund's Riskometer and investment objective.
Sectoral vs diversified mutual funds: What is the difference?
The primary difference is the level of sector concentration.
| Factor | Sectoral mutual fund | Diversified mutual fund |
|---|---|---|
| Investment focus | One specific sector | Multiple sectors, according to the scheme mandate |
| Diversification | Concentrated at sector level | Broader across industries |
| Key driver | Performance of the chosen sector | Performance of multiple sectors and holdings |
| Sector-specific risk | Higher | Generally more spread out |
| Role in portfolio | Focused exposure | Broader equity exposure |
Last updated: September 2026
A diversified mutual fund may reduce dependence on one industry's performance, but it remains subject to equity-market risk.
What should you check before investing?
Do not select a sectoral fund only because the sector has performed well recently. Consider the fund and the sector together.
Sector outlook
Understand the factors that influence the sector, including demand, competition, regulation, economic conditions, and technological changes.
Portfolio concentration
Review the fund's holdings and check whether a small number of companies account for a large proportion of the portfolio.
Riskometer
Check the SEBI Riskometer before investing. Its categories are Low, Low to Moderate, Moderate, Moderately High, High, and Very High.
The Riskometer communicates the scheme's assessed risk level. It is not a forecast of returns and should not be treated as one.
Expense ratio
Check the expense ratio, which represents the expenses charged to the scheme. Compare the cost with the fund's investment approach and other relevant factors rather than assuming that the lowest expense ratio automatically means the best fund.
Investment objective and benchmark
Read the scheme's investment objective and benchmark to understand what the fund is designed to achieve and how its performance is evaluated.
How are sectoral mutual funds taxed?
Sectoral mutual funds are generally equity-oriented schemes, but the applicable Income Tax treatment depends on factors such as the nature of the fund, holding period, and date of transfer.
For equity-oriented mutual fund units, the current rules generally distinguish between short-term and long-term capital gains.
- Short-term capital gains: For transfers covered under Section 111A, the applicable tax rate is currently 20% for transfers on or after 23 July 2024, subject to applicable conditions.
- Long-term capital gains: For transfers covered under Section 112A, long-term capital gains above the annual exemption threshold of Rs. 1.25 lakh are currently taxed at 12.5%, subject to applicable conditions.
You can read more about long-term capital gains and short-term capital gains before evaluating the tax impact of a sale.
Tax rules can change, so verify the applicable provisions for the relevant financial year before filing your return.
How can you invest in a sectoral mutual fund?
You can invest through an AMC, an eligible online investment platform, or another permitted distribution channel.
Before investing:
- Complete KYC: Ensure your required KYC process is complete.
- Define your objective: Identify why you want sector-specific exposure.
- Research the sector: Understand the factors that could affect its performance.
- Review the scheme: Check the investment objective, portfolio, Riskometer, costs, and benchmark.
- Choose an investment method: Depending on the scheme and platform, you may invest through an SIP or lumpsum.
- Monitor your exposure: Review how the sectoral fund fits with your wider portfolio rather than assessing it in isolation.
You can also explore mutual funds on the Bajaj Broking website and compare available schemes according to relevant criteria.
What is a practical way to evaluate a sectoral fund?
Suppose Riya has a diversified portfolio but wants additional exposure to the technology sector because she understands the industry's business drivers. She considers investing Rs. 1 lakh in a technology sectoral fund.
Before investing, she reviews the fund's holdings, expense ratio, Riskometer, benchmark, investment objective, and the technology sector's regulatory and economic risks.
If the fund loses 15% because the sector declines, the Rs. 1 lakh investment would fall to approximately Rs. 85,000 before considering other factors. If the sector subsequently recovers, the value could rise again.
The example shows why sectoral funds require you to consider both the opportunity and the possibility of significant fluctuations.
Conclusion
Sectoral mutual funds provide focused exposure to a particular industry and can be useful when you understand the sector and want targeted portfolio exposure. However, the same concentration can increase the impact of sector-specific risks and market cycles.
Before investing, review the sector outlook, scheme mandate, portfolio concentration, Riskometer, expense ratio, taxation, and your existing asset allocation. Treat historical performance as one input rather than a prediction of future returns.
Last reviewed: September 2026
Mutual funds are subject to market risk. Please read the scheme-related documents carefully before investing.
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Frequently Asked Questions
Understanding sectoral mutual funds
Risks and sector cycles
Is it safe to invest in sectoral mutual funds?
Sectoral mutual funds are not risk-free. At least 80% of their total assets remain invested in equity and equity-related instruments of one specified sector, so problems affecting that industry can influence a large part of the portfolio. Before investing, check the scheme’s Riskometer, holdings, valuations, sector outlook, and your existing exposure. A sectoral fund should not be treated as safe merely because its chosen industry has performed strongly in the recent past.
Are thematic mutual funds the same as sectoral funds?
No. A sectoral fund focuses on one particular sector, while a thematic fund follows a broader investment theme. Under SEBI’s February 2026 categorisation, both categories require at least 80% of total assets to follow their specified sector or theme. However, SEBI states that a theme can combine two or more sectors. This means a thematic portfolio can span several industries connected by one investment idea, while a sectoral portfolio remains focused on one sector.
What is the cyclical nature of sector funds, and why is it important?
The cyclical nature of sector funds refers to the way industries move through stronger and weaker business periods. Economic growth, interest rates, demand, commodity prices, government spending, and regulation can change conditions for a sector. This matters because a sector that performs strongly in one phase can underperform in another. You should therefore assess where the industry may be in its cycle rather than assuming that recent returns will continue.
What are the disadvantages of sectoral funds?
The main disadvantage is concentration risk. Because a sectoral fund keeps at least 80% of its assets in one sector, adverse developments can affect several portfolio companies together. Other disadvantages include cyclical risk, regulatory sensitivity, high-valuation risk, and difficulty timing entry and exit. Sectoral funds also provide less industry diversification than broader equity funds. You should therefore assess their role within your entire portfolio rather than reviewing the scheme in isolation.
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