A member in our WhatsApp community recently shared his story.
He put ₹10 lakh into a defense-themed mutual fund in early 2024. By the end of that year, it was worth nearly ₹18 lakh. He was thrilled.
Then 2025 happened. The same fund dropped over 20%. His ₹18 lakh became ₹14 lakh.
He panicked. “Mani, should I sell? Is this a bad fund?”
That’s the thing about thematic mutual funds. When the theme is hot, the returns are spectacular. When sentiment shifts, the same fund can lose months of gains in weeks.
Thematic funds aren’t bad. They’re just different. They require a specific approach, clear expectations, and honest risk awareness.
If you’re an NRI thinking about thematic funds in India, this guide covers everything – what they are, which themes matter in 2026, how NRIs can invest, the risks nobody talks about, and how much of your portfolio (if any) should go into them.
What Are Thematic Mutual Funds?
A thematic mutual fund invests in stocks connected by a common theme or idea – not just one industry, but multiple sectors tied to a broader trend.
For example, an “infrastructure” theme doesn’t just buy construction company stocks. It might also include cement, steel, power, engineering, logistics, and banking (because banks finance infrastructure). Multiple sectors, one theme.
This is the key difference between thematic funds and sectoral funds.
Sectoral fund: Invests in ONE specific sector (banking, IT, pharma).
Thematic fund: Invests across MULTIPLE sectors connected by a broader theme (infrastructure, consumption, manufacturing, energy transition).
SEBI requires thematic funds to invest at least 80% of their assets in stocks tied to their declared theme.
Thematic funds are equity-oriented. They carry the same risks as any equity fund, plus the additional concentration risk of being tied to a specific theme.
For a broader view of mutual fund investing, check our main guide first.
Why Thematic Funds Have Exploded in India
The numbers are striking.
Of the 161 sector and thematic funds available in India today, 64 were launched since 2020. That’s nearly 40% of all thematic funds created in just the last 5-6 years.
Thematic funds attracted the highest inflows among all equity new fund offers between 2023 and 2024.
Why?
India’s economy is undergoing structural changes.
Government spending on infrastructure. Make in India pushing manufacturing. Defense self-reliance. Digital transformation. Energy transition.
These aren’t just buzzwords. They represent real, multi-year shifts in where India’s money is going.
For NRIs watching from abroad, thematic funds offer a way to bet on specific aspects of India’s growth story rather than just buying a generic index fund.
But – and this is important – the popularity of thematic funds is also driven by AMCs (fund houses) launching them at exactly the wrong time. More on that later.
Popular Themes in India (2026)
Here are the major themes driving thematic fund activity right now, with an honest assessment of each.
1. Infrastructure
What it covers: Construction, cement, steel, power, roads, railways, ports, telecom networks, engineering, logistics.
Why it’s relevant: Government capital expenditure has been consistently rising.
Multi-year projects like highways, metro systems, bullet trains, dedicated freight corridors, smart cities. This is a structural, long-term theme.
The risk: Infrastructure spending is government-driven. Any budget cuts or policy changes directly impact these companies.
Also, many infra stocks ran up sharply in 2023-2024 and corrected in 2025.
Community perspective: Multiple returning NRIs in our group have invested in infrastructure themes because they’ve personally seen the construction boom in cities like Bangalore, Hyderabad, and Pune.
Notable funds: ICICI Prudential Infrastructure Fund, Bandhan Infrastructure Fund, Quant Infrastructure Fund.
2. Manufacturing
What it covers: Industrial companies, auto ancillaries, chemicals, capital goods, engineering, electronics manufacturing, textiles.
Why it’s relevant: “Make in India” and PLI (Production Linked Incentive) schemes are pulling global manufacturing into India.
Companies like Foxconn, Samsung, and Apple suppliers are setting up here. India’s manufacturing sector is at an inflection point.
The risk: Global trade tensions can disrupt supply chains. Manufacturing requires continuous capex.
Companies in this space are cyclical – they do well in expansion phases and suffer in downturns.
Notable funds: ICICI Prudential Manufacturing Fund, HDFC Manufacturing Fund, Axis Manufacturing Fund.
3. Defense and Aerospace
What it covers: Defense equipment makers, shipbuilders, electronics for defense, aerospace components, ancillary suppliers.
Why it’s relevant: India is one of the world’s largest defense spenders. Government policy has shifted dramatically toward indigenous production (Atmanirbhar Bharat). Order books for Indian defense companies are at all-time highs.
The risk: This theme had a massive run-up in 2023-2024 (some funds returning 70-80% in a single year).
Much of that was valuation expansion, not just earnings growth. In 2025, several defense-themed funds corrected 20%+. High dependence on government orders means lumpy revenue cycles.
Notable funds: HDFC Defense Fund, Motilal Oswal Defense Index Fund.
4. Consumption
What it covers: FMCG, retail, auto, consumer durables, media, entertainment, hospitality, food & beverages.
Why it’s relevant: India’s 1.4 billion population with rising incomes is the ultimate consumption story.
Growing middle class, urbanization, aspirational spending. This theme is perhaps the most durable of all.
The risk: Slower than infrastructure or defense in returns. Consumption is a long-burn theme, not a quick-gains play. FMCG valuations have historically been expensive.
Notable funds: ICICI Prudential Bharat Consumption Fund, Tata India Consumer Fund, SBI Consumption Opportunities Fund.
5. Energy Transition / ESG
What it covers: Solar, wind, battery technology, electric vehicles, green hydrogen, carbon capture, sustainable agriculture.
Why it’s relevant: India has committed to aggressive renewable energy targets. Solar capacity is expanding rapidly.
EV adoption is increasing. Global ESG (Environmental, Social, Governance) mandates are pushing capital toward sustainable companies.
The risk: Many companies in this space are early-stage with uncertain profitability.
Technology risk is real – today’s leading technology may be obsolete in 5 years. Valuations are often stretched based on future promises.
Notable funds: Tata Resources & Energy Fund, DSP Natural Resources & New Energy Fund.
6. Banking & Financial Services
What it covers: Banks, NBFCs, insurance, AMCs, fintech, payment companies.
Why it’s relevant: India’s banking sector is in its best shape in years. NPAs are at multi-year lows. Credit growth is strong.
Financial inclusion is expanding rapidly through digital channels.
The risk: Interest rate cycles affect bank margins. Any economic slowdown directly hits asset quality.
Regulatory changes (like RBI actions) can create sudden volatility.
Notable funds: ICICI Prudential Banking & Financial Services Fund, SBI Banking & Financial Services Fund, Nippon India Banking & Financial Services Fund.
7. PSU (Public Sector Undertakings)
What it covers: Government-owned companies in banking, oil, defense, mining, power, railways.
Why it’s relevant: PSU stocks were deeply undervalued for years. Government reforms, disinvestment, and improved governance have re-rated many PSU stocks.
The risk: PSU funds had extraordinary runs in 2023-2024 but corrected sharply in 2025.
These stocks are vulnerable to government policy changes and often lag in efficiency compared to private sector peers.
Notable funds: Invesco India PSU Equity Fund, SBI PSU Fund, CPSE ETF.
8. Technology / Digital
What it covers: IT services, software, cloud computing, SaaS, digital infrastructure, cybersecurity.
Why it’s relevant: India’s IT sector is a global powerhouse. Digital transformation spending continues globally. India is becoming a hub for GCCs (Global Capability Centers).
The risk: IT sector is heavily dependent on US/global spending. Dollar depreciation hurts Indian IT margins. AI disruption is a real concern for traditional IT services models.
Notable funds: ICICI Prudential Technology Fund, Tata Digital India Fund, Aditya Birla Sun Life Digital India Fund.
The Brutal Truth About Thematic Fund Timing
I need to be honest with you here. This is the part most articles skip.
Fund houses typically launch thematic funds AFTER the theme has already performed well.
They market them when excitement is highest. Media coverage is maximum. Returns look spectacular in the marketing materials.
By that time, valuations are stretched. Smart money has already entered. Retail investors – including many NRIs – enter last.
This pattern has played out repeatedly:
- Defense funds launched after defense stocks already doubled
- Infrastructure NFOs launched after infra stocks hit all-time highs
- Manufacturing funds marketed when the theme was already well-known
The inconvenient truth: By the time you hear about a hot thematic fund, you’ve probably already missed the best entry point.
What this means for NRIs: When you see advertisements, roadshows, and media buzz around a thematic fund, that’s usually a sign you’re late.
The best time to invest in a theme is when nobody’s talking about it, valuations are reasonable, and your conviction is based on fundamentals – not recent returns.
This doesn’t mean thematic funds are bad. It means timing and patience matter enormously.
Thematic vs Sectoral vs Diversified: Which Should NRIs Choose?
Let me simplify this.
Diversified equity funds (flexi-cap, multi-cap, large-cap):
- Invest across all sectors and themes
- Fund manager decides allocation
- Lower risk, broader exposure
- Should form the CORE of your India portfolio
Thematic funds:
- Invest across sectors within a specific theme
- More concentrated than diversified, less than sectoral
- Medium-high risk
- Should be a SATELLITE allocation (5-15% maximum)
Sectoral funds:
- Invest in ONE specific sector
- Highest concentration risk
- Highest volatility
- Only for experienced investors with strong conviction
My honest recommendation for most NRIs:
Build your core portfolio with diversified mutual funds first.
Add thematic funds only after your core is solid. And only in themes you genuinely understand and believe in for the long term (5-7 years minimum).
For most NRIs in our community, a good flexi-cap fund does 80-90% of the work. Thematic funds are the remaining 10-20% at most.
How NRIs Can Invest in Thematic Mutual Funds
The process is the same as investing in any Indian mutual fund.
Step 1: Open an NRE or NRO account
Your investments will be funded from either:
- NRE account: For foreign earnings, fully repatriable
- NRO account: For Indian earnings, partially repatriable
Step 2: Complete KYC
KYC is mandatory for all mutual fund investments. You’ll need:
- PAN card
- Passport
- Overseas address proof
- Indian address proof (if available)
- FATCA self-certification (for US NRIs)
- Photograph
KYC can be done through CAMS, Kfintech, or through your mutual fund broker.
Step 3: Choose your investment route
- Direct through AMC website: Lower expense ratio (no distributor commission)
- Through mutual fund platforms: CAMS, MFU (Mutual Fund Utility), Kfintech
- Through NRI-friendly platforms: SBNRI, INDmoney
- Through a financial advisor: Higher expense ratio but guidance included
Step 4: Invest via SIP or lump sum
For thematic funds, SIP is strongly recommended. It averages your purchase price and reduces the impact of timing risk.
US/Canada NRI Warning:
Some AMCs do not accept investments from US and Canadian NRIs due to FATCA compliance requirements. Check with the specific AMC before investing.
AMCs that commonly accept US NRIs (as of early 2026): UTI, Birla Sun Life, ICICI Prudential (for some schemes), and a few others. The list changes, so always verify.
For more on the process, check our mutual fund apps guide.
Tax Implications for NRIs
Thematic funds are equity-oriented funds. Here’s how they’re taxed.
Short-Term Capital Gains (held less than 12 months):
Taxed at 20%. (Revised from 15% after Union Budget 2024.)
Long-Term Capital Gains (held 12 months or more):
Taxed at 12.5% on gains exceeding ₹1.25 lakh per financial year. (Revised from 10% on gains exceeding ₹1 lakh after Budget 2024.)
TDS for NRIs:
AMCs deduct TDS on redemption. For STCG, TDS is at 20%. For LTCG, TDS is at 12.5%.
You can claim credit for this TDS when filing your Indian tax return.
Dividends:
Dividend income is added to your total income and taxed at your slab rate. For most NRIs, this means 30% + surcharge + cess. TDS of 20% is deducted on dividends paid to NRIs.
DTAA benefits:
If your country has a DTAA with India, you can claim credit for taxes paid in India against your tax liability in your home country. This avoids double taxation.
US NRI note: Indian mutual fund gains must be reported on your US tax return. Indian mutual funds may be classified as PFICs (Passive Foreign Investment Companies) under US tax law, which has unfavorable tax treatment. Consult a cross-border tax advisor.
Practical tax tip: Always hold thematic funds for more than 12 months to qualify for LTCG rates. The difference between 20% STCG and 12.5% LTCG is significant.
For the full picture on NRI taxation, see our capital gains guide.
How Much Should Go into Thematic Funds?
Here’s what financial planners (and our community’s experience) suggest.
Conservative NRI (lower risk tolerance): 0-5% of total India equity portfolio in thematic funds.
Moderate NRI (some market experience): 5-10% in thematic funds.
Aggressive NRI (experienced, high conviction): 10-20% in thematic funds.
Never go above 20%. Even if you’re extremely bullish on a theme.
The rest of your portfolio should be in diversified equity funds (flexi-cap, large-cap, multi-cap), fixed deposits, debt funds, and other asset classes.
Within thematic allocation, diversify across themes.
Don’t put your entire thematic allocation into one theme. If you’re putting 15% into thematic funds, split it across 2-3 themes. This way, if one theme underperforms, the others may compensate.
Investment horizon matters:
Thematic funds need patience. A minimum of 5-7 years. If you can’t commit to holding through 2-3 years of potential underperformance, these funds are not for you.
Common Mistakes NRIs Make with Thematic Funds
Mistake 1: Chasing last year’s top performer
The fund that returned 70% last year may lose 25% this year. Past performance in thematic funds is especially unreliable because themes are cyclical.
Mistake 2: Putting too much into one theme
“India’s infrastructure boom is unstoppable!” Maybe. But putting 40% of your portfolio into infrastructure is gambling, not investing.
Mistake 3: Treating thematic funds as core holdings
Thematic funds are satellites, not the core. Your core should be diversified funds that give you broad market exposure.
Mistake 4: Investing based on news headlines
By the time a theme is on CNBC and in WhatsApp forwards, the easy money has been made. The best thematic investments are made when the theme is boring and underappreciated.
Mistake 5: Not understanding what’s inside the fund
Many NRIs invest in “manufacturing” or “infrastructure” funds without knowing which stocks the fund actually holds. Always check the portfolio. A thematic fund may hold stocks you already own through your diversified funds – creating unintentional concentration.
Mistake 6: Ignoring exit loads and expense ratios
Thematic funds typically have higher expense ratios (0.5-1.5%) than index funds. Exit loads of 1% for redemptions within 1 year are common. Factor these into your return calculations.
Mistake 7: Panic selling during corrections
The defense fund member I mentioned at the start? He held on. His fund recovered. Thematic fund investors must expect 20-30% drawdowns. If you can’t stomach that, these funds aren’t for you.
Should You Invest in Thematic Funds at All?
Here’s my honest take.
Yes, if:
- Your core portfolio (diversified equity + debt + FD) is already in place
- You understand the theme deeply and believe in it for 5-7+ years
- You’re okay with higher volatility and temporary underperformance
- You’re investing through SIP (not timing a lump sum at the peak)
- Your total thematic allocation is 5-15% of your equity portfolio
- You have the discipline to hold during corrections
No, if:
- You don’t have a core diversified portfolio yet
- You’re investing because “everyone is talking about this fund”
- You need the money within 3 years
- You can’t handle a 20-30% drop without panicking
- You’re using thematic funds as your primary investment strategy
- You don’t understand the theme beyond a headline
For most NRIs, a well-chosen flexi-cap fund will outperform their thematic fund selections over 10 years. Not because thematic funds are bad – but because timing themes correctly is extremely hard, and most people get it wrong.
Thematic funds are the spice, not the meal. A little adds flavor. Too much ruins the dish.
For an overview of all investment options available to NRIs in India, check our comprehensive guide.
Quick FAQ
Q: What’s the minimum investment for thematic funds?
Typically ₹5,000 for lump sum and ₹100-₹1,000 for SIP, depending on the AMC.
Q: Can US NRIs invest in thematic funds?
Yes, but with restrictions. Not all AMCs accept US NRIs. Check FATCA compliance with the specific AMC. Offline investing may be needed for some.
Q: Should I invest in thematic index funds or actively managed thematic funds?
Active management makes more sense for thematic investing because the fund manager can select the best stocks within the theme. For broad market exposure, index funds are better.
Q: How do I track my thematic fund performance?
Use your AMC’s website/app, CAMS/Kfintech portals, or platforms like Value Research Online and Morningstar India.
Q: Can I switch between thematic funds?
Yes, but switching triggers capital gains tax. Plan switches carefully.
Q: Are SIPs better than lump sum for thematic funds?
Strongly yes. Thematic funds are volatile. SIP averages your cost and reduces timing risk.
Q: What’s the difference between NFO and existing thematic funds?
New Fund Offers (NFOs) for thematic funds often launch at peak hype. Existing funds with a track record are usually safer choices than untested NFOs.
Q: Can I invest in thematic funds through a SIP in my NRE account?
Yes. Set up a SIP from your NRE or NRO account. Most AMCs support auto-debit SIPs for NRI accounts.
Disclaimer: This article is for informational and educational purposes only. It is not investment advice. Mutual fund investments are subject to market risks. Past performance does not guarantee future returns. Thematic funds carry higher concentration risk than diversified funds. Always consult a SEBI-registered financial advisor before making investment decisions. Verify NRI eligibility with the specific AMC before investing.
If you’re building your India investment portfolio and want real-world perspectives from people who’ve done it, join our WhatsApp community at https://backtoindia.com/groups – 20,000+ NRIs helping each other with real, lived experience. It’s free and volunteer-run.
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