Summary of this article
Recent sector funds outperform broader large-, mid-, small-cap averages
Sector leadership rotates; winners often become laggards
Outperformance phases typically followed by sharp underperformance
Mis-timing can cause severe 1- and 5-year losses
Sectoral and thematic mutual funds have been on a roll lately, and flows have followed performance. Over the last year, Banking funds have returned 23.54 per cent, Auto & Transportation funds 17.32 per cent, followed by PSU funds (11.01 per cent) and Energy funds (10.88 per cent). These numbers look even sharper when set against the broader category averages in the same period – Large-cap funds (9.12 per cent), Mid-cap funds (6.63 per cent), and Small-cap funds (-2.83 per cent).
But the historical data also shows why this segment is not meant for every investor, because sector leadership is highly cyclical, and the cost of entering at the wrong time can be brutal.
Sector winners don’t stay winners always
FundsIndia has analysed the historical data across sectors and themes from 2010 to 2025. The calendar-year sector returns over these years make one point clear: sector leadership keeps rotating. A sector that tops the chart in one year can easily slide down the next year, and laggards often bounce back suddenly.
For instance, Realty appears both among strong years and among weak ones across the timeline. Metals show the same pattern. They were dominating in some years, then slipping sharply in others. Even traditionally “steady” pockets like fast-moving consumer goods (FMCG) and healthcare go through phases of being top performers and phases of being among the weakest.
This means sector funds can look like “smart picks” only in hindsight. In real time, investors typically chase sectors after a strong run - exactly when the probability of a reversal rises.
Outperformance is often followed by underperformance
As per data analysis by Funds India – 3-year CAGR outperformance vs Nifty 500 TRI since inception for each sector/theme, it showed a similar pattern: phases of outperformance are inevitably followed by phases of underperformance.
In other words, sector returns are not just volatile; they are mean-reverting. A strong multi-year run often leads to a weaker stretch afterwards. This makes “staying invested” in a sector fund very different from staying invested in diversified equity funds, where leadership rotation happens inside the portfolio itself, as shown by the data.
The hidden risk: Mis-timing can destroy returns
According to data from analysis by FundsIndia, if an investor is interested in sectoral or thematic funds, invests after the theme has played out, he or she could have to bear heavy losses.
As per the data, on a rolling basis (Jan 1995 to Dec 2025), the maximum 1-year underperformance vs Nifty 500 TRI for major themes has been steep as mentioned below:
FMCG TRI: -126 per cent
IT TRI: -91 per cent
Auto TRI: -64 per cent
Energy TRI: -61 per cent
Healthcare TRI: -54 per cent
PSU TRI: -46 per cent
Bank TRI: -44 per cent
Financial Services TRI: -30 per cent
And the drawdowns can stretch beyond a year. The maximum 5-year underperformance is even more sobering:
IT TRI: -551 per cent
FMCG TRI: -460 per cent
MNC TRI: -390 per cent
Auto TRI: -106 per cent
Healthcare TRI: -105 per cent
Energy TRI: -119 per cent
Financial Services TRI: -84 per cent
India Digital TRI: -65 per cent
So, historical data reveals that even if a theme is right over the long term, investors can still lose out simply because they entered after the run-up.
To conclude, while sectoral/thematic mutual funds can outperform in bursts as we saw in the last one-year period, the long-term data analysis shows the trade-off clearly: high reward comes with high cycle risk, and timing matters far more than in diversified equity categories.
