Thematic mutual funds as core holdings? 20 years of rolling return data make a compelling case

For years, thematic mutual funds have been viewed as tactical bets rather than long-term investments. The common criticism is that their concentrated portfolios, built around a single theme, are vulnerable to long stretches of underperformance. Consequently, investors are advised to keep diversified funds at the core of their portfolios and use thematic funds only as satellite holdings.But is concentration itself the problem?Even the Nifty 50, India’s most-tracked benchmark, has often been heavily skewed towards a handful of sectors. Financials have frequently accounted for more than one-third of the index, while IT and energy have dominated during different market phases.The key question is whether concentration necessarily leads to weaker long-term returns.A bl.portfolio analysis of 10-year and 15-year rolling returns using two decades of NAV data suggests that it need not.The flexi-cap category, which represents diversified active equity funds, delivered a worst-case (minimum) 10-year rolling return of 3 per cent and a minimum 15-year rolling return of 4 per cent. Surprisingly, eight of the 10 thematic categories recorded a higher minimum 10-year rolling return than the flexi-cap category. When the investment horizon was extended to 15 years, nine of the 10 categories recorded a higher minimum return on this downside measure.How we studied?We examined the 10-year and 15-year rolling returns of every thematic and sectoral fund with at least 20 years of NAV history. Of the 247 schemes in the broader universe, only 31 qualified. The core comparison covers 27 funds across 10 thematic and sectoral categories, while four other qualifying schemes were kept outside this comparison.For each category, the minimum represents the lowest rolling return recorded by any qualifying scheme, the maximum the highest, and the mean the average of the schemes’ mean rolling returns. These results were then compared with the flexi-cap category, the clearest available proxy for diversified active equity funds.The study is timely, given the surge in launches of niche thematic offerings such as innovation, business cycles, ESG, manufacturing and quant investing. As investors gain access to increasingly specialised products, understanding their long-term risk-return profiles becomes critical.Key trendsSeveral themes show stronger downside outcomesOne of the biggest myths surrounding thematic funds is that they inevitably lag diversified funds over the long run because of their concentrated portfolios. The rolling-return analysis tells a different story.The flexicap category delivered a worst-case 10-year rolling return of 3 per cent and a minimum 15-year rolling return of 4 per cent. Eight of the 10 thematic categories recorded a higher minimum 10-year rolling return, while nine recorded a higher minimum over 15 years.The picture is more mixed when average returns are considered. Flexi-cap funds delivered an average 10-year rolling return of 13 per cent, rising to 15.3 per cent over 15-year rolling periods. Against this benchmark, seven of the 10 thematic categories generated higher average 10-year rolling returns, while the Ethical category was effectively in line after rounding.Over 15 years, only three categories were above the flexi-cap mean. Technology and Pharma & Healthcare were clearly ahead, while Consumption, at about 15.35 per cent, was only marginally above the 15.3 per cent flexi-cap return.The findings suggest that thematic funds, as a group, are not inherently inferior to diversified funds. Several also exhibited stronger historical minimum outcomes, indicating that concentration did not necessarily translate into weaker long-term realised outcomes.Takeaway: Investors should not automatically dismiss thematic funds as tactical products. Carefully selected themes have historically generated long-term returns and downside resilience comparable to, and in several cases better than, diversified equity funds.Structural themes fared better than macro betsThe analysis reveals a broad divide between structural-growth themes and macro-driven sectors.Technology, Pharma & Healthcare, Consumption and Service Industry funds delivered average 10-year rolling returns of about 16 per cent, 15 per cent, 15 per cent and 15.3 per cent, respectively, compared with the flexi-cap category average of 13 per cent.Over 15 years, however, the picture was less uniform. Technology and Pharma & Healthcare remained ahead of flexi-cap, Consumption was broadly in line, while Service Industry was marginally below it. Importantly, all four categories recorded higher historical minimum 10-year and 15-year rolling returns than flexi-cap funds.A common thread across these themes is their exposure to longer-term trends such as rising digital adoption, healthcare spending, consumption growth and the expansion of the services economy rather than purely short-lived economic cycles.In contrast, Infrastructure and Commodities lagged the flexicap category on average returns over both 10-year and 15-year periods. Their average 10-year rolling returns were around 11 per cent, versus 13 per cent for flexicap funds.Their 10-year downside was also steeper. The lowest 10-year rolling return recorded in Infrastructure was -2.2 per cent, while Commodities managed just 0.8 per cent, compared with 3 per cent for flexi-cap funds. Over 15-year rolling periods, however, Commodities recorded a higher minimum than flexi-cap — 5.4 per cent versus 4 per cent — while Infrastructure remained behind at 3.1 per cent.The uneven performance is consistent with the cyclical nature of these sectors. Their fortunes are closely tied to government capital expenditure, interest-rate cycles, commodity prices and global economic conditions, resulting in long boom-and-bust phases that can test investors’ patience.Takeaway: Not all thematic funds should be treated alike. Themes supported by long-term structural growth have historically produced stronger outcomes in this sample. In contrast, macro-sensitive sectors remain more cyclical and can require careful timing and a higher risk tolerance.Longer horizons improved downside outcomesThe downside narrowed meaningfully as the investment horizon increased. Across almost every category, the worst historical outcome improved substantially when the holding period was extended from 10 years to 15 years.Technology illustrates this well. The lowest 10-year rolling return was 4.3 per cent. The minimum 15-year rolling return was much higher at 10.8 per cent.The same trend is visible across Infrastructure, Banking, Consumption, MNC, Opportunities and Service Industry funds. This is consistent with the benefit of allowing multiple business cycles to play out.Takeaway: The data suggests thematic funds require a genuinely long investment horizon. But 15 years should not be treated as a magic threshold. Longer holding periods improved historical minimum outcomes, but did not eliminate theme-specific risk or guarantee strong returns.Concentration isn’t the only riskThe analysis challenges the idea that concentration alone determines long-term thematic-fund outcomes.Technology and Pharma funds are among the most concentrated thematic categories studied, with portfolios largely confined to a single industry. Although these funds have expanded their investment universe within their sub-sectors over time, they have historically remained highly concentrated exposures.Yet they delivered some of the strongest long-term outcomes, generating average 15-year rolling returns of more than 16 per cent, ahead of the flexicap category’s 15.3 per cent. In contrast, Infrastructure funds, despite investing across a broader ecosystem of sectors including engineering, cement, capital goods, utilities and construction, delivered only around 11 per cent.Takeaway: The contrast suggests that the breadth of sectors within a theme is not, by itself, a reliable guide to its long-term outcome. Investors should judge thematic funds by the durability of their underlying growth drivers rather than simply by the number of sectors they hold.Wider dispersion within categoriesEven within the strongest themes, outcomes varied. In the Consumption category, average 10-year rolling returns ranged from roughly 13 per cent to 18 per cent among schemes. Within Technology, the range was 15 per cent to 18 per cent.Takeaway: Investors must evaluate individual funds based on the consistency of their rolling returns, sector weights within the theme and their ability to navigate inevitable downcycles.Prolonged drawdownsBeyond average returns, the length of time an index remains below its previous peak is a crucial consideration for long-term investors. This reflects one of the biggest risks associated with thematic investing: remaining below a previous peak for years.An underwater analysis of major sectoral and thematic indices confirms that this concern is valid. The Nifty Infrastructure Index remained below its previous peak for nearly 14 years. The Nifty PSU Bank index required almost 13 years to recover, while the Nifty PSE, Commodities and Energy indices each spent around nine years underwater.Takeaway: Such long drawdowns create a major behavioural challenge for thematic investors. Prolonged periods without regaining a previous peak can push investors to abandon a theme before a subsequent recovery. Time does not automatically heal every thematic drawdown. Investors should be particularly wary of themes whose historical recovery periods have stretched into a decade or more.ConclusionThe conventional perception that thematic funds are unsuitable for long-term investing deserves a rethink.Technology and Pharma & Healthcare stand out in the analysis. Both generated average rolling returns above flexicap over 10-year and 15-year periods and also recorded stronger historical minimum returns. Consumption also performed well, beating flexicap on average over 10 years and remaining broadly in line over 15 years. MNC funds, meanwhile, recorded stronger historical minimum returns, although their average 15-year return was slightly below that of flexicap funds.At the same time, the study reinforces that not all themes are created equal. Infrastructure and Commodities lagged flexicap funds on average returns over both horizons. Energy & Power, which was outside the core 10-category comparison, also lagged flexicap on average. These themes also featured among indices with some of the longest historical underwater periods.This highlights the fact that extending the investment horizon alone cannot overcome a weak or highly cyclical investment theme.In this sample, themes linked to longer-term trends such as digitalisation, rising healthcare spending and consumption generally produced stronger long-term outcomes, whereas sectors dependent heavily on capital expenditure, commodity prices or economic cycles produced more uneven results.For investors, the implication is more nuanced than simply treating all thematic funds as tactical bets. Carefully selected structural themes can serve as long-term satellite holdings alongside a diversified core. But the data does not make a case for replacing diversified funds with thematic bets; it shows that the quality and durability of the underlying theme matter as much as concentration itself.LONG VIEWStructural themes fared better than cyclicalsLonger horizons improved historical downside outcomesFund selection matters within strong themes Comments Published on August 8, 2026