Sectoral mutual funds have started drawing attention again in 2025. People are looking at them not just for short-term gains but as a way to catch specific economic waves. The rise in government spending on infrastructure, the steady push for renewable energy, and the global shift toward defence and AI-driven industries have all brought these funds back into focus.
In the past year, several sectors in India have outperformed the broader market. Defence and PSU funds have delivered strong returns as government orders increased. Energy and infrastructure funds have also benefited from public and private investment. On the other hand, IT and pharma, which once led the rally during the pandemic years, have cooled off.
The macro picture also adds fuel. Interest rates are expected to stabilize, which can help capital-heavy sectors like infrastructure and real estate. Meanwhile, India’s manufacturing and renewable energy policies have attracted foreign capital, driving optimism around specific industries.
Before diving into the numbers or best-performing funds, it’s worth understanding what sectoral mutual funds really are and why their performance tends to move in cycles.
For the latest market sector data, you can refer to:
- AMFI India: Mutual Fund Industry Trends
- Moneycontrol: Sectoral Fund Performance Tracker
2. What sectoral mutual funds actually do
Sectoral mutual funds focus on a single industry or segment of the economy. For example, a banking fund invests mainly in financial services, while a pharma fund sticks to healthcare and drug companies. The idea is simple: when one sector is expected to grow faster than others, these funds help investors benefit from that growth.
Unlike diversified mutual funds, which spread money across many sectors, sectoral funds stay concentrated in one area. This focus can lead to higher returns when the sector performs well, but it also makes them more volatile. If that sector faces a slowdown, the impact on your investment is immediate and often sharper.
Thematic funds are slightly broader. They invest based on a concept rather than a single industry. For example, a “digital India” theme may include IT, telecom, fintech, and even e-commerce companies. So while all sectoral funds are thematic in a narrow sense, not all thematic funds are purely sectoral.
This concentration means sectoral funds suit people who already have a diversified portfolio and want to add an extra layer of targeted exposure. For beginners, they can be tricky because timing plays a big role.
If you want to understand the structure of mutual funds in India and how sectoral funds fit into the broader picture, check:
- SEBI: Understanding Mutual Funds
- ET Money: Sectoral vs Thematic Funds Explained
3. How sectoral funds have changed in 2025
The sectoral fund space in India looks very different in 2025 compared to just two years ago. The themes driving growth have shifted along with the economy, policy focus, and global trade trends.
AI and technology-driven sectors are seeing renewed interest, not because of a pandemic boost this time but because of real business adoption. Indian IT companies are adapting to automation and AI services, which has helped them recover after a quiet 2023. Defence and PSU-focused funds have also climbed as the government continues to push domestic manufacturing and higher capital expenditure.
Infrastructure funds have become stronger after the Union Budget 2025 extended incentives for housing and logistics projects. Similarly, the renewable energy and EV sectors are seeing long-term inflows, backed by state and private investments in clean power and mobility. On the other hand, FMCG and pharma have slowed down as input costs and export pressures affected margins.
The interest rate environment also matters. With the Reserve Bank of India expected to hold rates steady or even cut slightly, capital-heavy sectors like real estate, manufacturing, and utilities are likely to benefit.
The shift shows a broader trend: investors are no longer chasing pandemic-era winners but are aligning with India’s structural growth story. The focus is now on industries tied to public spending, infrastructure, and technology.
For a clear view of how sectoral funds have performed recently, see:
- Moneycontrol: Sectoral Fund Returns
- Morningstar India: Mutual Fund Category Performance
4. When sectoral investing works and when it doesn’t
Sectoral investing can be rewarding, but only when the timing aligns with a sector’s growth phase. Every sector moves in cycles. When an industry is expanding—because of new demand, policy support, or a strong earnings outlook—sectoral funds in that space tend to outperform. But when growth slows or valuations stretch too far, returns can drop quickly.
A sectoral fund works best during the early and mid-phases of a cycle. For instance, infrastructure funds often perform well when the government announces new projects or raises spending. Similarly, technology and banking funds do better when credit growth and digital adoption pick up. The challenge is that most people enter when these funds have already delivered high returns.
Identifying overheated sectors is equally important. One clue is valuation. If price-to-earnings ratios in a sector are well above historical averages, it often signals that optimism has peaked. Another sign is when too many new funds are launched around the same sector. That usually means most of the easy gains are gone.
Patience matters more than prediction. Sectoral funds may stay flat for months before moving again. Investors who exit early often miss the recovery. The goal is not to find the perfect entry point but to understand whether a sector’s story still has room to grow.
You can track sector trends and valuations using:
- NSE India: Sector Indices Performance
- Moneycontrol: Sector Overview
5. Sectoral vs. thematic funds: knowing the difference
Many people use the terms “sectoral” and “thematic” as if they mean the same thing, but they don’t. The difference is in focus and flexibility.
A sectoral fund puts money into a single industry, like banking, healthcare, or infrastructure. It sticks to companies that belong to that sector and doesn’t stray from it. That concentration brings higher potential returns but also higher risk, since everything depends on how one part of the economy performs.
A thematic fund takes a wider view. It invests around a theme that may cut across several sectors. For example, a “Make in India” fund could include manufacturing, logistics, energy, and capital goods. A “digital India” theme might hold IT, telecom, fintech, and internet companies. This gives more diversification than a single-sector fund but still limits exposure to a few linked industries.
In short, a sectoral fund is like betting on one player, while a thematic fund bets on the entire team. Sectoral funds can deliver strong results if you pick the right moment and the right sector, but they require more timing and conviction. Thematic funds are smoother because they spread risk across multiple areas that support a broader trend.
For short-term tactical investing, sectoral funds work better when a clear sector opportunity exists, such as in defence or infrastructure this year. For longer-term growth, thematic funds may offer steadier returns, as they can adapt when one sector underperforms.
To understand how fund houses define and classify these categories, see:
- AMFI: Types of Mutual Funds
- Morningstar India: Thematic vs Sectoral Funds
6. How to build exposure the smart way
Sectoral funds are best used as add-ons, not as the core of your portfolio. Their returns can swing widely, so it helps to start small and build gradually. Most financial planners suggest keeping total exposure to sectoral funds within 10 to 15 percent of your overall investments. This keeps you involved in specific opportunities without putting your portfolio at risk if one sector turns weak.
The way you invest also matters. A Systematic Investment Plan (SIP) works well for people who want to invest steadily without timing the market. It spreads your entries across different price levels, reducing the impact of short-term volatility. A lump-sum investment can be better if you have strong conviction about a sector’s future and you enter early in its growth phase. But that requires confidence in your research and the patience to stay invested through corrections.
Another way to be smart with sector exposure is through diversification within sectors. For example, instead of holding only a banking fund, you could combine it with a power or infrastructure fund to balance cyclical and defensive parts of the economy. You don’t need to chase every sector that’s trending. Focus on the few that align with your risk tolerance and financial goals.
Rebalancing once or twice a year helps too. If one sector has done extremely well and now makes up a large part of your portfolio, trimming profits and reallocating elsewhere keeps risk in check.
You can use these tools and sources to track your mutual fund mix and sector exposure:
- ET Money Portfolio Analyzer
- Morningstar Portfolio X-Ray Tool
7. What 2025 data says: sectors leading the pack
The first half of 2025 has shown a clear split between sectors that are gaining momentum and those losing steam. Infrastructure, defence, and PSU funds have led the charts, while FMCG and pharma have seen slower growth.
Infrastructure funds benefited from record government spending and faster project approvals. According to Moneycontrol’s sectoral tracker, many infrastructure funds delivered double-digit returns in the past year as capital expenditure in roads, logistics, and housing rose sharply. Defence and PSU-focused funds followed closely, supported by the government’s “Make in India” push and improved earnings from public sector companies.
Renewable energy funds are also seeing steady inflows as both domestic and global investors look for clean energy exposure. Solar, wind, and EV-linked companies are expected to remain attractive as policy incentives continue. Meanwhile, IT funds, after struggling in 2023, are slowly recovering thanks to demand in automation and AI solutions.
In contrast, pharma funds have underperformed due to pricing pressure in exports and slow recovery in domestic demand. FMCG funds remain steady but have not kept up with more cyclical sectors because consumption growth has been uneven.
What matters most in 2025 is not just past performance but what’s driving it. Government policies, global supply chains, and company-level innovation are shaping which sectors rise next. Investors who pay attention to these drivers rather than short-term rankings will make better long-term decisions.
For verified data and return comparisons, check:
- Morningstar India: Sectoral Mutual Fund Category Returns
- AMFI India: Mutual Fund Performance Reports
8. Common mistakes people make with sectoral funds
Sectoral funds can be rewarding, but they also attract mistakes that often erase the gains people hope to make. The most common one is chasing past winners. Many invest after seeing high one-year returns, assuming the trend will continue. By the time they enter, the sector may already be at its peak. This leads to buying high and exiting low.
The second mistake is ignoring an exit plan. Sectoral rallies don’t last forever. Each industry goes through growth and correction cycles. Staying too long in a fund after the sector starts cooling can trap your money for years. Reviewing your investments every six to twelve months helps you spot when to move profits elsewhere.
Another mistake is forgetting to rebalance. If one sector performs strongly, it can suddenly make up a large share of your portfolio. Rebalancing ensures you don’t carry too much exposure to a single area. This also allows you to lock in gains and redirect them to other funds or safer options.
A subtler mistake is treating sectoral funds as a replacement for diversified equity funds. They are meant to complement, not replace, a broad-based portfolio. Diversified funds spread risk across sectors, while sectoral ones focus deeply on one area. Having both provides balance between growth and stability.
Finally, people often overlook how market sentiment affects sectors. News, budget announcements, and global events can quickly change outlooks. It’s better to invest based on long-term potential and fundamentals, not short-term excitement.
For practical guidance on evaluating mutual fund holdings, visit:
- SEBI Investor Education: Monitoring Mutual Fund Investments
- ET Money: Common Investing Mistakes and How to Avoid Them
9. Should you invest now?
Whether to invest in sectoral funds in 2025 depends on your goals, risk tolerance, and patience. These funds aren’t for everyone. They work best for people who already have a balanced portfolio and can handle short-term volatility.
Right now, some sectors like infrastructure, PSU, and defence continue to have strong government support. These may offer growth over the next few years. But investors need to remember that the best time to buy sectoral funds is before the rally, not during it. Entering after a strong performance year often leads to disappointment when the sector cools.
If you have a long-term view, a Systematic Investment Plan (SIP) can help you enter gradually. It lowers the risk of mistiming the market. For people who prefer tactical investing, allocating a small portion in a sector that aligns with upcoming policy or economic shifts can make sense. For example, if interest rates ease and capital spending grows, infrastructure or manufacturing funds could stay attractive.
It is better to avoid making investment decisions based on short-term news or market excitement. Instead, look at the fundamentals: demand growth, policy support, company earnings, and valuation.
Sectoral funds can fit into your plan if you use them intentionally — as a focused bet, not a substitute for diversification. The ideal time to enter is when a sector is recovering from a slowdown and long-term triggers are visible but not yet priced in.
To help decide if a sector is right for you, explore:
10. Summary
Sectoral mutual funds can be powerful tools when used with clarity and discipline. They focus on specific parts of the economy that may outperform for a period, but that strength always comes with higher risk. In 2025, funds linked to infrastructure, PSU, defence, and renewable energy are leading, while others like FMCG and pharma are quieter.
The lesson is not to chase what’s hot. Understand the cycle, the policy drivers, and how much risk fits your comfort level. Sectoral funds should stay as a small but strategic part of your portfolio. Start with research, use SIPs if you prefer stability, and review your holdings regularly.
When used with patience and proper timing, these funds can help you capture targeted growth opportunities without straying from long-term financial goals. Stay diversified, stay informed, and invest with reason rather than excitement.
For continued updates and insights on sector trends, you can follow:
- AMFI India: Mutual Fund Data and Reports
- Moneycontrol: Sectoral Fund Performance Tracker