About Sector Mutual Funds
- A sector consists of similar businesses that offer somewhat the same type of product or service. The Indian economy has several sectors, including information technology, banking, pharma, chemicals, aviation, etc. These sectors keep evolving based on many factors and developments. For instance, the defence sector may fare well when the Union Budget announces special aid or growth plans in the sector.
- If you want to invest in such sector-focused opportunities, you can consider investing in sector mutual funds. Also called sectoral mutual funds, these are equity funds that are required to invest at least 80% of their total assets in the dedicated sector. Within the sector, these funds can invest in stocks with varying market capitalisations. All in all, they give investors exposure to the best-performing stocks in a specified sector.
Sector funds can be of various types, as follows:
- Pharma sector funds: These invest in pharma stocks, biotechnology and life science technology stocks, manufacturers of medical and healthcare stocks, etc.
- Information Technology (IT) funds: These invest in companies relating to IT, electronics, etc.
- Banking and financial services funds: These invest in major Banking, Financial Services and Insurance (BFSI) companies.
- Auto sector mutual fund: This fund invests in auto sector companies, including manufacturing and ancillary businesses.
- Energy sector mutual fund: This fund invests in stocks of companies engaged or related to the energy sector, whether in the production or exploration of alternative energy.
Since sectoral funds focus on a particular sector, they are exposed to a high risk of concentration. As such, in a bearish market or in case of underperformance of a sector, the fund can run into significant losses. On the other hand, if the sector has bright prospects, the fund can perform very well.
How Do Sector Funds Work?
Features of Sectoral Mutual Funds
- Higher concentration risk: Sector funds limit their investment to a specific sector. As such, your portfolio's performance is vulnerable to that sector's performance.
- Diversification: Though sectoral funds focus on a single sector, they can diversify by investing in stocks across market capitalisations within it.
- Growth in the sector: Not all sectors grow at a similar pace, as they have different opportunities and limitations. For instance, the information technology sector disrupts at a faster pace compared to FMCG.
- Peaks and plunges: Although sectors have phases of peaks and plunges, you can invest in sectoral funds regardless of the phase via SIP. This could help you benefit through compounding and cost averaging.
- Long-term investments: Since sector funds are equity-oriented schemes, it is best to invest in them for a longer horizon to beat volatility in the short run.
Advantages of Investing in Sector Funds
- High growth potential: Sector funds enjoy high growth potential when the underlying stocks of the chosen sector are performing well. Hence, your returns maximise.
- Professional management: Like other mutual funds, professional fund managers manage sector funds too. Therefore, you can benefit from their expertise.
- Long-term investment: Sector funds are excellent investments for long-term financial goals. Ideally, you should stay invested in these funds for over 5-7 years to fully reap the benefits.
Risks Involved in Sector Funds
- Market risk: Since sectoral mutual funds invest in equity, they are exposed to market risks and volatility.
- Liquidity risk: In case you wish to redeem your units in a sector downturn, the mutual fund house may find it difficult to find sellers to liquidate your holdings.
- Low diversification risk: Sector funds focus on a specified sector, which limits the scope of diversification across other industries and asset classes.
- Cyclical risk:The fund may be adversely impacted by the risk of business cycles or economic cycles. For example, after 2008, infrastructure had a significant downcycle, and after 2011, capital goods experienced a similar phase. Had you invested 50% of your portfolio in these funds because you were bullish on them, you would have incurred heavy losses. Therefore, it is best to diversify and take calculated risks, especially when it comes to investing in sectoral funds.
Factors To Consider Before Investing in Sector Mutual Funds
Mutual funds are typically designed to diversify your portfolio and sectoral funds aim to do this by investing their assets in a specific sector. Before you attempt to invest in sectoral funds, you need to consider the following:
- Investors may need to conduct preliminary market research on the particular sector they are choosing to invest in before doing so as sector funds require you to take a chance on the prospect of a single industry. You would not want to make the mistake of placing all your eggs in one basket and exposing yourself to risk.
- Whether you are new to investing or an experienced player, it is imperative that you grasp knowledge of the sector you choose to invest in so as to have a clue about its potential growth prospects. You should be aware of what drives particular sectors and how this takes place.
- Consider your horizon of investment when you wish to invest in sector funds. Sectors differ in terms of their potential growth and various factors affect different sectors. Some sectors may grow faster than others, so investors must be prepared for long-term investment if required.
- Think about your overall portfolio when you wish to invest in a sectoral fund. If your aim is portfolio diversification, you may contemplate a particular sector to invest in if you have securities and instruments that do not include this kind of investment.
- Think about your own investment style and behaviour before you invest. Are you ready to take risks if it does affect your fund? Think of these things before you go ahead and invest.
- Similar to any other mutual fund, you are able to invest in sectoral funds both during peaks and plunges via the route of a SIP (Systematic Investment Plan). Such systematic and regular investments over periods may help you benefit by cost averaging as well as compounding.
Who Should Invest in Sector Mutual Funds?
- Requires professional expertise: Like other mutual funds, professional fund managers manage sector funds. So if you want to capitalise on a sector but aren’t sure about which stocks to choose, sectoral mutual funds could be a good option.
- Can bear high risk: Sector mutual funds are highly risky not just because they are equity-oriented but also because they have a limited scope for diversification. However, if a sector does well, the sectoral fund can perform well too, and vice versa. So investors with high-risk tolerance should consider investing in such funds.
- Needs exposure to a specific sector: You can consider investing in a particular sector fund if your overall investment portfolio lacks exposure to that.
Taxability of Sector Funds
Sector funds are treated as equity funds for tax purposes.
Here’s how capital gains from selling sector fund units are taxed:
- Short-term Capital Gains (STCG): Gains on sector fund units sold within a year of buying are taxed at 15% plus applicable cess.
- Long-term Capital Gains (LTCG): Gains up to Rs. 1 lakh per year on selling sectoral fund units after a year of holding them are tax-free. Gains beyond this limit are taxed at 10% with no indexation benefit.
Besides, dividends earned on sector funds are added to the investor's taxable income and taxed at the rate as per the income tax slab. There is also a 10% TDS on dividend amount exceeding Rs. 5000 in a financial year.
How To Invest in Sector Funds?
Investing in a Sector Fund is hassle-free when done through your Angel One account. You just have to follow these simple steps: Step 1: Log in to your Angel One account. Note: In case you do not have an account with Angel One, you can open a demat account with us in under a few minutes by submitting the necessary documents.
Step 2: Determine a Sector Fund fund that suits your needs and risk profile. You can learn more about each Sector Fund on the Angel One app. Things to consider at this stage are:
- Search for the fund you want to invest in.
- Analyse the fund’s past performance, tax incidence, and the sectors and companies it invests in. You can also calculate the potential returns using the calculator.
- Evaluate the fund’s level of risk, its ratings and expense ratio.
Step 3: Once you finalise the Sector Funds you want to invest in, open your Angel One account, go to the Mutual Funds section, and look for it.
- Decide whether you want to invest via SIP or make a one-time investment
- Decide your monthly SIP date. Now, enter the amount you want to invest and choose the payment mode.
- After placing the order, you can create an AutoPay to make hassle-free future instalments in case of SIP investments.
Top 10 Sector Mutual Funds
The following are the top Thematic/Sectoral Funds in India:
| Name | AUM | CAGR 3Y (%) | Expense Ratio (%) | Absolute Returns – 1Y (%) |
| SBI PSU Fund | 5,979.80 | 35.11 | 0.83 | 34.40 |
| Invesco India PSU Equity Fund | 1,491.71 | 33.00 | 0.90 | 31.89 |
| Aditya Birla SL PSU Equity Fund | 5,713.52 | 32.44 | 0.61 | 33.43 |
| ICICI Pru PSU Equity Fund | 1,924.01 | 31.41 | 0.86 | 27.67 |
| Franklin India Opportunities Fund | 8,271.28 | 30.84 | 0.58 | 17.30 |
| ICICI Pru Transportation and Logistics Fund | 2,935.69 | 29.84 | 0.94 | 29.12 |
| Bandhan Transportation and Logistics Fund | 659.01 | 27.31 | 0.85 | 31.31 |
| ICICI Pru Manufacturing Fund | 6,315.87 | 26.83 | 0.79 | 23.41 |
| UTI Transportation & Logistics Fund | 3,905.77 | 26.37 | 0.82 | 28.75 |
| 360 ONE Quant Fund | 902.16 | 26.17 | 0.62 | 20.14 |
Note: The above data is as of February 2026
SBI PSU Fund
SBI PSU Fund is managed by Rohit Shimpi and was launched on 7 July 2010. It is benchmarked against the BSE PSU Total Return Index. The fund aims to offer investors long-term capital appreciation along with the flexibility of an open-ended structure by actively investing in a diversified portfolio of equity shares of domestic public sector undertakings and their subsidiaries, as well as in debt and money market instruments issued by PSUs and other entities. It has an expense ratio of 0.83%.
Invesco India PSU Equity Fund
Invesco India PSU Equity Fund is managed by Hiten Jain and Sagar Gandhi and was launched on 1 January 2013. It is benchmarked against the BSE PSU Total Return Index. The fund seeks to achieve capital appreciation by investing in equity and equity-related instruments of companies in which the central or state government holds a majority stake, exercises management control, or has the authority to appoint most of the board of directors. It carries an expense ratio of 0.90%.
Aditya Birla SL PSU Equity Fund
Aditya Birla SL PSU Equity Fund is managed by Dhaval Gala and was launched on 1 January 2020. It is benchmarked against the BSE PSU Total Return Index. The fund aims to deliver long-term capital appreciation by investing in equity and equity-related instruments of Public Sector Undertakings (PSUs).
ICICI Pru PSU Equity Fund
ICICI Pru PSU Equity Fund is managed by Antariksha Banerjee and Sharmila D’mello and was launched on 12 September 2022. It is benchmarked against the BSE PSU Total Return Index. The fund aims to achieve long-term capital appreciation by primarily investing in equity and equity-related securities of Public Sector Undertakings (PSUs). It comes with an expense ratio of 0.86%.
Franklin India Opportunities Fund
Franklin India Opportunities Fund is managed by R. Janakiraman, Sandeep Manam, and Kiran Sebastian and was launched on 21 February 2000. It is benchmarked against the Nifty 500 Total Return Index. The fund seeks to generate capital appreciation by investing in companies undergoing special situations, such as corporate restructuring, regulatory or government policy changes, temporary operational challenges, and other unique circumstances that present growth opportunities. It has one of the lowest expense ratios at 0.58%.
ICICI Pru Transportation and Logistics Fund
ICICI Pru Transportation and Logistics Fund is managed by Rajat Chandak, Sharmila D’mello, and Priyanka Khandelwal and was launched on 28 October 2022. It is benchmarked against the Nifty Transportation & Logistics Total Return Index. The fund aims to achieve long-term capital appreciation by primarily investing in equity and equity-related securities of companies operating in the transportation and logistics sectors. It has a higher expense ratio of 0.94%.
Bandhan Transportation and Logistics Fund
Bandhan Transportation and Logistics Fund is managed by Daylynn Pinto, Harshal Joshi, Ritika Behera, and Gaurav Satra and was launched on 25 October 2022. It is benchmarked against the Nifty Transportation & Logistics Total Return Index. The fund aims to deliver long-term capital growth by primarily investing in equity and equity-related securities of companies operating in the transportation and logistics sector. It has an expense ratio of 0.85%.
ICICI Pru Manufacturing Fund
ICICI Pru Manufacturing Fund is managed by Antariksha Banerjee and Sharmila D’mello and was launched on 11 October 2018. It is benchmarked against the Nifty India Manufacturing Total Return Index. The fund aims to achieve long-term capital appreciation by building a portfolio primarily invested in equity and equity-related securities of companies focused on the manufacturing sector. It charges an expense ratio of 0.79%.
UTI Transportation & Logistics Fund
UTI Transportation & Logistics Fund is managed by Sachin Trivedi and was launched on 11 April 2004. It is benchmarked against the Nifty Transportation & Logistics Total Return Index. The fund seeks to achieve long-term capital appreciation by primarily investing in equity and equity-related securities of companies operating in the transportation and logistics sector. It has an expense ratio of 0.82%.
360 ONE Quant Fund
360 ONE Quant Fund is managed by Ashish Ongari and was launched on 26 November 2021. It is benchmarked against the BSE 200 Total Return Index. The fund aims to provide long-term capital appreciation by investing in a portfolio of equity and equity-related securities selected using a quantitative investment approach. It maintains a comparatively lower expense ratio of 0.62%.
