Sectoral and Thematic Funds — Concentrated by Design

A sectoral fund holds companies from one industry. A thematic fund holds companies connected by an idea that may run across several industries, which makes the boundary broader but still narrow relative to a diversified scheme.

Because the mandate restricts where the manager can invest, the scheme cannot step aside when that part of the market is doing badly. A diversified scheme can shift weights between areas; a sectoral one is committed by construction.

That is not a flaw. It is what you bought. But it means the outcome depends far more on the sector than on the manager, which reverses how these are usually discussed.

This is the part worth understanding before anything else, and it is uncomfortable.

Funds are launched when there is appetite for them, and appetite for a sector builds after that sector has done well. So new sectoral and thematic offerings tend to appear towards the later part of a strong stretch rather than at the start of one.

Investors then arrive on the back of the record that made the launch attractive, and a meaningful share of the eventual money enters near the top of the enthusiasm. That is not a claim about any particular scheme; it is a pattern in how launches and demand line up. Our page on new fund offers covers the same dynamic more generally.

The defence is boring and effective: decide whether you want the exposure before somebody offers it to you, not after seeing a chart.

A diversified scheme suits being left alone for fifteen years. A concentrated one usually does not, and that changes what you are taking on.

With a sector holding you have decided that this part of the market will do well, which implies a view about when it will have done so. That means a second decision at some point: when to reduce or exit. Nobody sells you the second decision alongside the first, and most people never make it.

So before buying, write down what would make you reduce it. A target proportion of the portfolio, a horizon, or a change in the underlying case. Something written in advance is worth considerably more than a judgement made later while the holding is either exciting or painful.

We are not saying nobody should hold one. The conditions under which it is reasonable are just narrower than the marketing suggests.

• On top of a diversified core, never instead of one. The core does the goal-funding work.
• As a small share of the equity portion, sized so that a poor outcome is disappointing rather than damaging.
• With a reason you can state that is not "it has done well recently".
• With a long horizon, since concentration needs more time to work through a cycle than a diversified holding does.

And check what you already own before adding. A diversified equity scheme already holds companies from every major sector, so a sector fund on top increases an exposure you have rather than adding a new one, as our page on portfolio rebalancing explains.

Sectors take turns, and not on a schedule anybody can read in advance.

A part of the market that led for three years can lag for the next five while something else leads, and the switch is usually visible only afterwards. Somebody holding a concentrated position through that period is holding it for considerably longer than they planned, which is fine if the horizon was genuinely long and painful if it was not.

The behavioural trap follows from that. Investors tend to arrive in a sector after it has led and leave after it has lagged, which is the same mistake twice with the sequence reversed. Our guide on what a red number actually means deals with the second half of that pattern.

These schemes typically sit at the higher end of the scale, and that reading is computed from the actual portfolio rather than assigned by the fund house, as our page on the riskometer sets out.

The suitability sentence next to it is worth reading too, since it states the horizon the scheme is intended for. On concentrated schemes that horizon is long, and shorter money does not belong there regardless of how compelling the story is.

We are distributors rather than investment advisers, and we do not recommend schemes on this site or offer views on which sector will do well. What we will do is tell you when something belongs as a small part of a portfolio rather than as its centre. To talk that through, get in touch, and if you are choosing between broader categories, flexi cap versus multi cap is the more relevant page.