Sectoral Fund

When an investor is convinced that one slice of the economy — say public-sector banks, defence, or pharma — is about to outperform, a sectoral fund is the vehicle that lets them bet on it without picking individual stocks. The real question it answers is: how concentrated can a regulated equity fund get, and is that focus worth the loss of diversification?

How SEBI defines it

Under SEBI's categorisation framework, a sectoral fund must invest a minimum of 80% of its assets in equity of a single sector. That is what separates it from a diversified fund or a flexicap. In February 2026, SEBI tightened the rules further: sectoral and thematic schemes must keep portfolio overlap with other equity categories under 50%, and schemes that fail this test face corrective action. The intent is to stop fund houses from launching near-identical 'banking' or 'tech' funds that simply repackage the same top stocks.

The risk-reward bargain

Concentration cuts both ways. A pharma fund can shine when that sector rallies and lag badly when it falls out of favour — there is no other sector to cushion the blow. Returns are cyclical and timing matters enormously, which is why most advisers treat sectoral funds as a satellite holding, not a core one.

Indian investors should also note the timing trap. Sectoral New Fund Offers tend to launch *after* a sector has already run up, when sentiment is hottest — which is often the worst entry point. The recently popular defence and PSU themes are good cautionary examples.

Where it fits

For disciplined investors with a strong, researched view and a multi-year horizon, a small sectoral allocation can add punch to a portfolio already built on diversified funds. Taxation is the same as any equity fund: gains held over a year are long-term capital gains. But for most people, a flexicap or index fund captures sector upswings with far less single-bet risk. The honest verdict: sectoral funds are a tool for conviction, not a default building block.