Sectoral Mutual Funds vs Broad Market Funds - When Does Each Make Sense

"Should I bet big on pharma? My cousin made 40% last year."

We hear variations of this question constantly in our WhatsApp community. And the honest answer is: it depends on timing, risk appetite, and how much of your portfolio you're willing to see swing wildly.

At Belong, we've seen NRIs make fortunes with sectoral bets. We've also seen them lose years of gains when sectors turn. The difference usually comes down to understanding what you're buying and why.

This guide breaks down the sectoral vs broad market debate without the jargon. By the end, you'll know exactly when each approach makes sense for your situation.

The Core Difference: Concentration vs Diversification

Think of it like this: A sectoral fund is a specialist. A broad market fund is a generalist.

Sectoral funds invest at least 80% of their assets in companies from one specific industry. Banking funds buy only bank stocks. Pharma funds hold only pharmaceutical companies. IT funds invest exclusively in technology firms.

Broad market funds (flexi-cap, multi-cap, large-cap) spread investments across multiple sectors and company sizes. If banking struggles, their gains from pharma or IT can offset the loss.

The practical impact? Sectoral funds amplify both gains and losses. Broad market funds smooth out the ride.

According to SEBI's mutual fund categorization, sectoral funds must maintain minimum 80% exposure to their designated sector. This concentration is both their strength and weakness.

Why This Matters More for NRIs

Living abroad, you can't monitor Indian markets as closely as domestic investors. You're sleeping when markets open. You're working when sector news breaks.

This creates a specific challenge with sectoral funds. They require active monitoring and timely decisions. Miss the exit signal on an infrastructure fund, and a 30% gain can turn into a 10% loss within months.

Broad market funds, managed by professionals who watch markets daily, adjust allocations for you. For NRIs with demanding careers in Dubai, Abu Dhabi, or anywhere in the Gulf, this hands-off approach often makes more sense.

👉 Tip: If you can't dedicate at least 2-3 hours weekly to tracking sector trends and news, think twice before making sectoral funds a significant part of your portfolio.

How Sectoral Funds Actually Work

Sectoral funds target specific slices of the economy. Here are the main categories available in India:

Banking & Financial Services: Invests in banks, NBFCs, insurance companies, and payment processors. Performance tracks interest rate cycles and credit growth.

Information Technology: Holds IT services companies like TCS, Infosys, Wipro. Returns depend on global IT spending and rupee-dollar movements.

Pharma & Healthcare: Includes drug manufacturers, hospitals, diagnostics companies. Performance links to healthcare demand, regulatory approvals, and export policies.

Infrastructure: Covers construction, capital goods, cement, power, and logistics. Returns follow government capex announcements and project execution.

Consumption: Focuses on FMCG, retail, and consumer discretionary companies. Performance tracks rural and urban spending patterns.

Each sector has its own cycle. Banking typically does well when interest rates fall. Pharma shines during health crises. Infrastructure rallies when governments announce capex budgets.

The fund manager's job is to pick the best stocks within that sector. But they cannot diversify outside it, even if the entire sector is struggling.

How Broad Market Funds Work

Broad market funds come in several flavours:

Flexi-cap funds have complete freedom to invest anywhere. The manager can go 80% large-cap today and shift to 60% mid-cap next quarter. No restrictions on allocation.

Multi-cap funds must maintain minimum 25% each in large-cap, mid-cap, and small-cap stocks. This ensures diversification across company sizes.

Large-cap funds invest primarily in the top 100 companies by market capitalization. Lower volatility, steadier returns.

The key advantage? Fund managers can rotate between sectors based on which ones look promising. If banking valuations get expensive, they can reduce exposure and add pharma. This flexibility is built into the mandate.

For a deeper dive, see our guide on flexi-cap funds.

Performance Reality Check: 2024-2025 Data

Let's look at actual numbers instead of theoretical comparisons.

Sectoral fund performance (5-year CAGR as of mid-2025):

Source: Angel One Sectoral Fund Rankings, January 2025

Broad market fund performance (5-year CAGR):

Source: Scripbox Flexi Cap Rankings, November 2024

2025 short-term reality: The flexi-cap category delivered average returns of just 2.7% in 2025, according to Outlook Money. Infrastructure sectoral funds continued outperforming, while technology lagged due to global IT spending slowdowns.

The lesson? Sectoral funds can dramatically outperform, but only when you're in the right sector at the right time.

👉 Tip: Don't chase last year's best-performing sector. By the time returns are visible, the easy gains are often gone.

The Timing Problem with Sectoral Funds

Here's what most articles won't tell you: Sectoral fund success depends heavily on entry and exit timing.

Consider infrastructure funds. After 2008, the sector experienced a brutal downcycle. Investors who entered in 2007 at peak enthusiasm waited nearly a decade to recover their capital. Those who entered in 2020, when valuations were depressed, saw 33%+ annual returns.

The same story played out with pharma. Pharma funds lost money in 2022 (down 8%), then delivered 40% returns in 2024 as hospital demand recovered and government healthcare schemes expanded.

Broad market funds smooth this timing risk. When one sector struggles, others compensate. You don't need to predict which sector will outperform next quarter.

For NRIs who can't actively monitor Indian market cycles, this timing requirement makes sectoral funds significantly riskier than they appear on paper.

When Sectoral Funds Make Sense

Sectoral funds aren't inherently bad. They're powerful tools when used correctly. Consider them if:

You have strong sector conviction: You deeply understand an industry through your work or research. A healthcare professional might genuinely have insights into pharma trends. An IT professional might spot technology shifts before analysts.

You've identified a structural growth story: Some sectors benefit from multi-year trends. India's infrastructure push, digital adoption, and healthcare expansion are examples. These aren't short-term bets but decade-long tailwinds.

You already have a diversified core portfolio: Sectoral funds work best as "satellite" positions around a diversified core. If 70-80% of your portfolio is in broad market funds, adding 10-20% in sectoral funds can boost returns without excessive risk.

You can tolerate 30-40% drawdowns: Sectoral funds can lose significant value during sector downturns. If watching your portfolio drop 35% would cause you to panic-sell, avoid them.

You have a 5+ year horizon: Sectors need time to play out. Short-term sectoral bets often fail because cycles don't align with investor patience.

When Broad Market Funds Make Sense

Broad market funds suit most NRI investors. Choose them if:

You want hands-off investing: Fund managers handle sector rotation, stock selection, and timing decisions. You can focus on your career and life abroad.

You're building long-term wealth: For goals like retirement or children's education 10-15 years away, broad market funds provide steady compounding without timing stress.

You're new to Indian equity investing: Starting with diversified exposure helps you understand market dynamics before concentrating on specific sectors.

You want to invest via SIP: Systematic Investment Plans work better with diversified funds. SIPs in sectoral funds can lead to averaging into a declining sector.

You can't monitor markets regularly: If you check your portfolio quarterly rather than weekly, broad market funds match your involvement level.

For NRIs specifically, explore our guide on how to select the right mutual fund.

The Core-Satellite Approach: Best of Both Worlds

Most experienced investors don't choose between sectoral and broad market funds. They use both strategically.

Core portfolio (70-85%): Diversified funds like flexi-cap or multi-cap funds form the foundation. These provide market returns with reasonable volatility.

Satellite positions (15-30%): Sectoral funds in 1-3 high-conviction themes. These aim to generate alpha above market returns.

Example allocation:

• 40% Flexi-cap fund (core)
• 30% Large & mid-cap fund (core)
• 15% Infrastructure sectoral fund (satellite)
• 15% Pharma sectoral fund (satellite)

This approach captures sectoral upside while maintaining portfolio stability. If your sectoral bets fail, the core holdings protect your overall wealth.

Financial experts consistently recommend limiting sectoral exposure to 5-10% of total portfolio, according to Scripbox. Going beyond this increases concentration risk significantly.

👉 Tip: Never allocate more than 10% of your portfolio to any single sectoral fund, regardless of how confident you feel about the sector.

Risk Comparison: What Could Go Wrong

Understanding downside scenarios helps you decide appropriately.

Sectoral fund risks:

• Concentration risk: All eggs in one basket. If the sector tanks, everything tanks.
• Cyclical risk: Sectors move in cycles. Being on the wrong side of a cycle hurts badly.
• Timing risk: Entry and exit points matter enormously.
• Regulatory risk: Government policy changes can devastate specific sectors overnight.
• Liquidity risk: During sector downturns, finding buyers for your units can be difficult.

Broad market fund risks:

• Manager risk: Poor stock selection affects returns, but diversification limits damage.
• Market risk: Broad market declines affect all funds, but recovery is typically faster than sector-specific downturns.
• Mediocre returns: Diversification can mean missing sector-specific rallies.

The key difference: Sectoral fund risks are concentrated and potentially severe. Broad market fund risks are distributed and typically more manageable.

Expense Ratios and Costs

Sectoral funds often carry higher expense ratios than diversified funds due to specialized management and concentrated research requirements.

Typical expense ratios (Direct plans):

Over a 20-year investment horizon, even 0.3% difference in expenses compounds to lakhs of rupees on a substantial portfolio.

Always compare direct plan expenses before investing. Use platforms that offer direct plans to minimize costs.

Tax Implications for NRIs

Good news: Tax treatment is identical for sectoral and broad market equity funds. Both are equity-oriented funds under Indian tax law.

Current rates (effective from July 2024):

TDS at redemption: 20% on STCG, 12.5% on LTCG. This is deducted by the fund house before you receive proceeds.

DTAA benefits: If you're a UAE resident, you can claim credit for Indian taxes paid. Since UAE has no income tax, your effective tax is what you pay in India.

For detailed guidance, see our NRI mutual fund taxation guide.

👉 Tip: Hold equity funds for at least 12 months to benefit from the lower LTCG rate. Short-term trading in either sectoral or diversified funds triggers higher taxation.

The GIFT City Alternative

Here's something most comparison articles miss: NRIs can access mutual funds through GIFT City with significant advantages.

Why GIFT City matters:

• No TDS at redemption: Unlike domestic mutual funds, GIFT City funds don't deduct tax when you withdraw.
• USD-denominated: Your investment and returns stay in dollars, eliminating currency conversion hassles.
• Tax-free for UAE NRIs: Since you're in a zero-tax jurisdiction, and GIFT City income isn't taxed in India, returns are effectively tax-free.

The Tata India Dynamic Equity Fund is now available through GIFT City with a $500 minimum investment. It's a diversified equity fund, not sectoral, but demonstrates how GIFT City is expanding options for NRIs.

Explore available funds on our GIFT City Mutual Funds Explorer.

How to Evaluate a Sectoral Fund Before Investing

If you decide to invest in sectoral funds, here's a checklist:

1. Understand the sector cycle 

Where is the sector in its cycle? Early growth, peak expansion, or decline? Entering at peak enthusiasm usually means buying expensive.

2. Check valuation metrics 

Compare the sector's current P/E ratio with historical averages. Significant premiums to historical averages suggest limited upside.

3. Analyze fund portfolio 

Review top holdings. Is the fund concentrated in a few stocks, or diversified within the sector? Higher concentration means higher stock-specific risk.

4. Evaluate fund manager track record 

Has the manager navigated previous sector cycles successfully? Check 5-year and 10-year returns, not just recent performance.

5. Review rolling returns, not point-to-point 

Rolling returns show consistency across different market conditions. Point-to-point returns can be misleading depending on start and end dates.

6. Set entry and exit criteria 

Define your target return and stop-loss level before investing. Don't invest in sectoral funds without exit discipline.

How to Evaluate a Broad Market Fund

For diversified funds, the checklist differs:

1. Allocation style 

Does the fund lean towards large-caps (stable) or mid/small-caps (volatile)? Match this with your risk tolerance.

2. Expense ratio 

Lower is better for long-term holdings. Compare within the category.

3. Consistency over multiple market cycles 

A fund that performs in both bull and bear markets indicates genuine manager skill.

4. Risk-adjusted returns (Sharpe ratio) 

Higher Sharpe ratios mean better returns per unit of risk taken. JM Flexicap, for example, has the highest Sharpe ratio (1.18) in the flexi-cap category.

5. AUM size 

Very small AUMs may indicate liquidity issues. Very large AUMs can limit manager flexibility. Mid-range is often optimal.

6. Portfolio turnover 

High turnover means higher transaction costs and potential tax implications. Lower turnover suggests a buy-and-hold approach.

Common Mistakes NRIs Make

We've seen these errors repeatedly:

Chasing recent performance: Investing in last year's top-performing sector after gains are already realized. This is the most common and costly mistake.

Overallocating to sectoral funds: Putting 40-50% of portfolio in sectoral bets because "India's infrastructure story is guaranteed." Nothing in markets is guaranteed.

Ignoring exit discipline: Buying sectoral funds without defining when to sell. This leads to holding through devastating downturns.

Investing via SIP in sectoral funds without sector knowledge: SIPs work brilliantly for diversified funds. For sectoral funds, they can mean averaging into a declining sector for years.

Confusing thematic with sectoral: Thematic funds (like manufacturing or ESG themes) are broader than sectoral funds. They're not interchangeable.

Ignoring currency risk: Even if a fund performs well in rupee terms, rupee depreciation against the dollar can erode returns for NRIs. Consider this in your calculations.

Learn more about thematic mutual funds and how they differ from sectoral funds.

A Framework for Deciding

Still unsure which approach suits you? Answer these questions:

1. How much time can you dedicate to monitoring investments?

• Less than 1 hour/week → Broad market funds
• 2-3+ hours/week → Can consider sectoral allocation

2. What's your investment horizon?

• Less than 5 years → Broad market funds (or avoid equity altogether)
• 5-10+ years → Either approach can work

3. How would you react to a 35% portfolio drop?

• Panic and sell → Broad market funds only
• Hold steady or buy more → Sectoral funds acceptable

4. Do you have specific sector knowledge?

• No special expertise → Broad market funds
• Deep industry understanding → Selective sectoral allocation

5. Is this your only Indian equity exposure?

• Yes → Broad market funds for diversification
• No, I have other diversified investments → Sectoral funds can complement

What We Recommend at Belong

After years of helping NRIs build India portfolios, here's our practical advice:

For most NRIs: Start with 100% broad market funds. Build a base of 2-3 diversified funds (flexi-cap + large-cap or multi-cap). Get comfortable with market volatility.

After 2-3 years: If you've developed sector conviction and maintained investment discipline, consider adding 10-15% in one sectoral fund. Infrastructure and pharma currently have multi-year structural tailwinds.

Never do: Go all-in on sectoral funds, invest in sectors you don't understand, or ignore your exit strategy.

For tax-efficient investing: Explore GIFT City options where available. The tax advantages for UAE NRIs are substantial.

Compare your options using our NRI FD Comparison Tool for fixed-income allocations and GIFT City Mutual Funds Explorer for equity.

Your Next Steps

Understanding the sectoral vs broad market debate is the first step. Taking action is what builds wealth.

Step 1: Assess your current portfolio. Calculate what percentage is in sectoral versus diversified funds. If sectoral allocation exceeds 15%, consider rebalancing.

Step 2: For new investments, start with a diversified flexi-cap or multi-cap fund. Build your core before adding satellites.

Step 3: If you want sectoral exposure, research 2-3 sectors with structural tailwinds. Infrastructure and healthcare currently show multi-year growth potential.

Step 4: Check your residential status using our Residential Status Calculator. This affects your tax treatment on mutual fund gains.

Have questions about your specific situation? Join our WhatsApp community where many NRIs discuss their portfolio strategies. It's free, and you'll get perspectives from people in similar situations.

Ready to start investing? Download the Belong app to explore GIFT City mutual funds and USD fixed deposits, all designed specifically for NRIs.

Sources

• SEBI Mutual Fund Categorization: sebi.gov.in
• AMFI Data on Sectoral Fund Flows: amfiindia.com
• Outlook Money - 2025 Fund Performance: outlookmoney.com
• Value Research Fund Rankings: valueresearchonline.com
• Scripbox Sectoral Fund Analysis: scripbox.com
• Angel One Fund Data: angelone.in