Thematic Funds vs Broad Market Funds

​A member of our WhatsApp community recently asked me something that made me pause.

"Ankur, my friend made 40% in an infrastructure fund last year. My flexi cap gave me 18%. Am I doing something wrong?"

No. You're doing something right.

That infrastructure fund? Same fund gave negative returns for almost six years after 2008. His flexi cap? Recovered within two years after every major crash in the past decade.

Here's what I've learned after advising NRIs for over 12 years: the funds that make the best stories rarely make the best portfolios.

Thematic funds captured ₹1,09,711 crore from Indian investors in 2024 alone. 52 out of 70 new fund launches in FY25 were thematic or sectoral. That's not a trend. That's a frenzy.

But is it smart? Or are NRIs chasing yesterday's returns?

At Belong, we've built tools and a community specifically for NRIs navigating these decisions. This guide covers everything you need to know before deciding between thematic excitement and diversified discipline.

What Exactly Are Thematic and Sectoral Funds?

Let's clear the confusion first. These terms get used interchangeably, but they're different.

Sectoral funds invest in one industry only. A pharma fund buys Sun Pharma, Dr. Reddy's, Cipla. Nothing else. If pharma crashes, your entire investment crashes.

Thematic funds follow a broader idea that spans multiple sectors. A "Make in India" theme might include manufacturing, infrastructure, and capital goods companies. More diversified than sectoral, but still concentrated around one narrative.

Broad market funds (flexi cap, multi cap, large cap, index funds) spread investments across sectors based on market conditions or index weights. The fund manager isn't betting on one story. They're betting on India's overall growth.

👉 Tip: If you can't explain why a particular sector will outperform for the next 5 years, you probably shouldn't have more than 10% of your portfolio in thematic funds.

The Seduction of Thematic Returns

I understand the appeal. Look at these numbers:

Fund Category
5-Year Returns (Top Performers)
Infrastructure Funds
30-42% CAGR
PSU Funds
28-31% CAGR
Banking Funds
18-22% CAGR
Flexi Cap Funds
18-27% CAGR
Nifty 50 Index
~12% CAGR

Sources: Angel One, Groww, NSE India

When infrastructure funds deliver 42% while your index fund gives 12%, it's hard not to feel like you're missing out.

But here's what those tables don't show: the years of pain before the party started.

The Recovery Problem: Why Timing Matters More Than You Think

This is the part most articles skip. It's also the part that protects your wealth.

Infrastructure funds launched in 2007-08 near the sector peak left investors waiting 5-6 years just to break even. Some took even longer. The global financial crisis crushed infrastructure stocks, and they didn't recover until the mid-2010s.

IT sector funds after the 2000 dotcom crash? Over a decade to return to pre-crash levels.

A Business Today report from April 2025 noted that while broad equity portfolios typically recover within 2-3 years after a downturn, sectoral portfolios may take many years, sometimes over a decade.

Broad market funds don't have this problem. They rotate into whatever's working. When IT struggles, banking picks up. When banking struggles, consumption takes over. The fund manager adapts.

👉 Tip: Before investing in any thematic fund, ask yourself: "Can I stay invested for 10 years even if returns are negative for the first 5?" If the answer is no, stick with diversified funds.

What Broad Market Funds Actually Offer

I run through this comparison with every NRI who joins our community. Here's what diversified funds provide that thematic funds can't:

Automatic rebalancing. A flexi cap fund manager moves money from overvalued sectors to undervalued ones. You don't need to time anything.

Reduced single-point failure. If you bet on pharma and FDA issues hit Indian companies, your entire investment suffers. In a diversified fund, pharma might be 8% of the portfolio. The damage is contained.

Consistent compounding. Flexi cap funds have delivered 18-27% average returns over 5 years. Not the highest peaks, but not the deepest valleys either.

Lower stress. You're not constantly wondering if "your sector" is still in favour.

For NRIs managing investments from thousands of miles away, this matters. You can't monitor Indian markets daily. You shouldn't need to.

Who Should Actually Consider Thematic Funds?

I'm not saying thematic funds are always wrong. They have a place. But that place is specific:

Experienced investors with a core portfolio already in place. If you have ₹50 lakh in diversified funds and want to add ₹5 lakh in a theme you understand deeply, that's reasonable.

People with genuine sector expertise. A software engineer in Dubai who understands IT valuations might have an edge in tech funds. A healthcare professional might genuinely understand pharma cycles.

Those with 7-10 year horizons for thematic allocation. Not 3 years. Not 5 years. The cycles in sectoral funds are long.

Investors who can accept total loss of thematic allocation. If your infrastructure bet goes to zero, does it ruin your retirement? If yes, don't make that bet.

Warren Buffett's advice applies here: invest in a sector only if you understand it and believe it will perform well. Limit sector exposure to 10% of your total portfolio.

The Real Cost of Chasing Performance

Here's data that doesn't get discussed enough.

Studies show retail investors in sectoral funds earn 3-5% less annually than fund returns due to poor entry/exit timing.

Why? Because most people buy after the rally starts and sell after the crash begins.

In March 2025, sectoral fund inflows crashed 97% from ₹5,711 crore in February to just ₹170 crore. Investors panicked out at exactly the wrong time.

In July 2025, sectoral funds again topped inflows at ₹9,426 crore. Most of it came from new fund launches, meaning investors bought after fund houses marketed recent performance.

This is the thematic trap: buy high, sell low, repeat.

👉 Tip: If you're hearing about a sector from WhatsApp forwards and YouTube videos, you're probably late. The smart money moved months ago.

How Thematic Funds Actually Work (The Mechanics)

SEBI requires sectoral and thematic funds to invest at least 80% of assets in their designated theme or sector. This leaves fund managers with limited flexibility.

If the banking sector crashes 30%, a banking fund cannot rotate into IT or pharma. It must stay in banking. The fund manager can only pick better banking stocks within the falling sector.

Broad market funds face no such restriction. A flexi cap fund must invest 65% in equities but can shift freely across large, mid, and small caps based on where the fund manager sees value.

This structural difference explains why thematic funds are more volatile. It's not a bug. It's a feature. The concentration creates both higher highs and lower lows.

Tax Implications for NRIs: Same Rules, Different Impact

Both thematic and broad market equity funds follow the same NRI taxation rules:

Holding Period
Tax Rate
TDS Rate
Less than 12 months (STCG)
20%
20%
More than 12 months (LTCG)
12.5% (above ₹1.25 lakh)
12.5%

Source: AMFI Tax Regime, Equitymaster

But here's where it gets interesting for NRIs.

Thematic funds encourage trading. When your sector runs up 40%, the temptation to book profits is strong. When it crashes, panic selling kicks in. Each trade triggers TDS.

Broad market funds encourage holding. Less volatility means less emotional trading. Longer holding periods mean more gains qualify for the lower LTCG rate.

If you're in the UAE where there's no capital gains tax, India's 12.5% LTCG still applies to your mutual fund gains. But if you trade frequently in thematic funds, you pay 20% STCG instead.

Over 10 years, this difference compounds significantly.

👉 Tip: Use Belong's Residential Status Calculator to confirm your tax status before investing. Your classification affects which deductions you can claim.

The GIFT City Alternative: Best of Both Worlds?

For UAE NRIs specifically, there's an option that changes the calculation entirely.

GIFT City mutual funds offer:

Zero capital gains tax in India. Under Section 10(4D), specified funds at GIFT City are exempt from Indian capital gains tax for non-residents.

No TDS deduction. Unlike regular Indian mutual funds where 12.5-20% TDS applies, GIFT City funds don't deduct tax at source.

USD denomination. Your investment and returns stay in dollars, protecting against 3-4% annual rupee depreciation.

For UAE residents with no local income tax, this creates a genuinely tax-free investment path.

The Tata India Dynamic Equity Fund launched at GIFT City in September 2025 with just $500 minimum investment. This makes GIFT City accessible beyond high-net-worth individuals.

Explore available options through Belong's GIFT City Mutual Funds Explorer.

Building a Sensible Allocation

Based on conversations with hundreds of NRIs in our community, here's what a balanced approach looks like:

Core portfolio (70-80%): Diversified funds

  • Flexi cap funds for active management across market caps
  • Index funds (Nifty 50, Nifty Next 50) for low-cost broad exposure
  • Multi-asset allocation funds for automatic equity-debt rebalancing

Tactical allocation (10-20%): Thematic exposure (if at all)

  • Only in themes you understand deeply
  • Only with money you won't need for 7-10 years
  • Preferably through SIP to average out entry timing

Safety allocation (10-20%): Stable income

This structure lets you participate in thematic rallies without betting your retirement on them.

How to Evaluate a Thematic Fund Before Investing

If you've decided thematic exposure fits your profile, here's my checklist:

1. Check sector cycle positioning Is the sector early in its growth phase or has it already rallied 100%+? Defence funds launched in 2024 came after stocks had already delivered 100-150% gains. Late entrants face valuation risks.

2. Review 10-year performance, not just 3-year A fund showing 35% 3-year returns might have given -15% for the previous 7 years. Look at full cycles.

3. Understand the fund's flexibility Some thematic funds interpret themes broadly. A "consumption" fund might include FMCG, retail, and auto. That's more diversified than a pure FMCG sectoral fund.

4. Check expense ratio Thematic funds often charge higher expenses. If you're paying 2%+ annually, your returns need to be significantly higher just to match cheaper diversified alternatives.

5. Assess fund manager's track record in that theme Has this manager navigated a full sector cycle? Or did they join when performance was already strong?

👉 Tip: Compare thematic funds against flexi cap funds using the same time periods. Often, the flexi cap delivers 80% of the thematic return with 40% of the volatility.

Common Mistakes NRIs Make With Thematic Funds

Over 12 years of advising NRIs, I've seen these patterns repeat:

Investing based on WhatsApp forwards. By the time a sector becomes popular discussion, professional investors have already positioned themselves. You're buying what they're selling.

Treating thematic funds as core holdings. Putting 50%+ of your portfolio in infrastructure because "India is building" ignores that infrastructure stocks can underperform for years even as construction booms.

Ignoring currency impact. A thematic fund returning 25% in rupees might give you only 18-20% in dirham terms after rupee depreciation.

Switching themes based on recent performance. Selling your underperforming pharma fund to buy the hot infrastructure fund is classic buy-high-sell-low behaviour.

Not accounting for TDS in returns. That 30% return becomes 24% after 20% TDS if you sell within a year. Your actual return might be lower than a diversified fund that you held longer.

What the Experts Say

I'm not alone in this view.

Morningstar India's analysis suggests investors are better off avoiding sector funds entirely unless they have genuine expertise and long horizons.

PrimeInvestor recommends keeping sector fund allocation at maximum 10-15% of portfolio, and only in themes that have underperformed (not outperformed) recently.

Nilesh D Naik, Head of Investment Products at Share.Market (PhonePe), advised: "Most retail investors, especially those new to investing, would do well to avoid allocating fresh investment to thematic and sectoral funds."

The consensus among professionals is clear: thematic funds are spicy side dishes, not the main course.

A Framework for Decision-Making

When NRIs ask me whether to go thematic or diversified, I ask them these questions:

Question
If Yes →
If No →
Do I have 70%+ in diversified funds already?
Thematic possible
Build core first
Can I hold for 7-10 years regardless of returns?
Thematic possible
Stick to diversified
Do I understand this sector deeply?
Thematic possible
Stick to diversified
Will losing this money change my life?
Stick to diversified
Thematic possible
Am I investing because of recent returns?
Don't invest yet
Proceed carefully

If you answered "Thematic possible" to all questions, a small allocation makes sense. Otherwise, broad market funds serve you better.

For diversified exposure, consider exploring:

For thematic exposure (if appropriate for your profile):

  • Banking and Financial Services funds during underperformance cycles
  • IT funds when valuations correct significantly
  • Infrastructure funds only with 10+ year view

Use Belong's Mutual Funds Explorer to compare options and check which funds accept NRI investments from your country.

The Bottom Line

Thematic funds are not inherently bad. They're tools. But like any tool, they work only when used correctly.

For most NRIs in the UAE managing investments remotely, broad market funds offer the right balance of growth and peace of mind. They let you participate in India's growth story without requiring daily monitoring or expert-level sector knowledge.

If you want thematic exposure, keep it small (10-15% maximum), choose themes you genuinely understand, and commit to a 7-10 year horizon.

And for the most tax-efficient path, explore GIFT City mutual funds that offer Indian equity exposure with zero capital gains tax for UAE residents.

Next Steps

Check your current allocation. Is more than 15% in thematic/sectoral funds? Consider rebalancing.

Join our community. Many NRIs in our WhatsApp group share their experiences with different fund categories. Real stories help more than generic advice.

Download the Belong app. Access our FD comparison tool, GIFT City fund explorer, and compliance checklist built specifically for NRIs.

Download the Belong App

Sources