Systematic Investment Plans (SIPs) have become one of the most effective and popular ways for retail investors in India to participate in the stock market. By investing small amounts monthly in mutual funds, investors can build wealth steadily through the power of compounding.
However, while SIPs are designed to encourage disciplined long-term investing, not all SIP recommendations are safe. Increasingly, SIP agents and distributors have been accused of pushing investors toward risky sectoral and thematic funds—funds that may perform well temporarily but carry significant volatility and concentration risks.
This practice is driven by a mix of higher commissions, investor psychology, and short-term performance chasing. Unfortunately, many retail investors fall into the trap, investing in funds unsuited for their goals, only to regret it later when the cycle turns.
What Are Sectoral Funds?
Sectoral funds are mutual funds that invest in a single sector or industry such as:
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IT (Information Technology)
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Banking & Financial Services
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Healthcare/Pharma
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Energy/Oil & Gas
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Infrastructure
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FMCG (Fast-Moving Consumer Goods)
These funds concentrate only on one sector, unlike diversified equity funds that spread risk across industries.
The Appeal of Sectoral Funds
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High Returns in Booms: When a sector rallies, returns can be spectacular (e.g., IT funds during the 2020-21 tech boom).
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Easy to Market: Charts showing 40%-50% annual returns in a hot sector are persuasive sales tools.
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Investor Excitement: People love investing in familiar themes—“India IT story,” “Banking boom,” “Make in India infrastructure.”
But what is rarely highlighted is the flip side: when the sector falls out of favor, returns can collapse brutally, leaving SIP investors stuck with poor long-term performance.
How SIP Agents Push Sectoral Funds
Let’s break down the common sales tactics used by agents and distributors to push retail investors toward sectoral SIPs:
1. Highlighting Past Returns
Agents often show investors charts of the last 1-2 years when a sector fund performed exceptionally. For example:
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During the pharma rally in 2020, pharma funds returned 70%+.
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In 2021, IT funds delivered 40%+.
By focusing on short-term performance, they create urgency—convincing investors that this is the “golden opportunity.”
2. Emotional Storytelling
Agents tie sectoral funds to big narratives:
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“India is becoming a digital superpower—IT funds will keep soaring.”
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“Healthcare demand will only grow after Covid—pharma is the future.”
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“Banking reforms mean financial sector growth is unstoppable.”
These story-driven pitches appeal to emotions, not logic, making investors believe the growth story is permanent.
3. Exploiting FOMO
By saying “everyone is investing in this sector,” agents trigger Fear of Missing Out (FOMO). This herd mentality makes investors feel left out if they don’t act quickly.
4. Ignoring Risk Warnings
Most investors don’t read scheme documents. Agents exploit this by downplaying risk disclosures, rarely mentioning that sectoral funds are meant for experienced investors with high risk tolerance.
5. Higher Commissions
Agents/distributors earn higher commissions on sectoral/thematic funds compared to plain index or diversified equity funds. This creates a financial incentive to “push” these products regardless of suitability.
6. Selling SIPs as “Safe”
The word “SIP” is often marketed as safe and long-term. By combining “SIP” with risky funds, agents mask volatility: “It’s a SIP, so don’t worry, it will average out.” This is misleading because averaging works best in diversified funds, not narrow sectoral bets.
Why This Is Dangerous
1. Concentration Risk
Unlike diversified equity funds, sectoral funds are not spread across industries. If one sector underperforms, the entire portfolio suffers.
2. Cyclical Nature of Sectors
Sectors move in cycles:
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IT booms may last 2-3 years but then stagnate for 5 years.
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Banking faces NPAs during downturns.
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Pharma has regulatory risks.
Investors who start SIPs at the peak of a cycle often face years of negative or flat returns.
3. False Sense of Security
SIPs in diversified equity funds generally smooth volatility. But in a sectoral fund, averaging doesn’t work if the sector itself is in a long slump.
4. Unsuitable for Retail Investors
Sectoral funds are meant for seasoned investors who understand cycles and can time entry/exit. For ordinary SIP investors saving for long-term goals, they are usually inappropriate.
5. Long-Term Underperformance
Data shows that over 10-15 years, diversified funds and index funds outperform most sectoral funds because they avoid concentration risks.
Real-World Examples
1. IT Funds (2000 Dotcom Crash)
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IT sector funds boomed in the late 1990s.
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After the dotcom crash, these funds lost over 70%.
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Investors who entered at the top took more than a decade to recover.
2. Pharma Funds (2015–2020)
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Pharma was hot in 2014–15, with double-digit returns.
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From 2015 to 2019, the sector massively underperformed due to U.S. FDA crackdowns.
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Many retail investors stuck in SIPs saw flat or negative returns for 5+ years.
3. Banking Funds (2008 Global Crisis)
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Before 2008, banking stocks were on fire.
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After the Lehman collapse, banking funds crashed 60%+.
These cycles illustrate why blind SIPs in sectoral funds can be wealth destroyers.
Why Investors Fall for It
The psychology behind why investors buy into risky SIPs pushed by agents is important:
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Herd Mentality: If everyone in the office is buying an IT SIP, it feels safe.
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Recency Bias: Investors assume the recent performance trend will continue forever.
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Overconfidence: People believe they understand sectors like banking or IT just because they use those services.
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Illusion of Safety: The word “SIP” creates a false sense of protection.
How to Protect Yourself
1. Understand Fund Categories
Diversified equity funds (multi-cap, flexi-cap, large-cap) are safer for long-term SIPs. Sectoral funds should be optional add-ons, not core investments.
2. Limit Exposure
If you want to invest in sectoral funds, keep it to 5-10% of your portfolio only.
3. Match With Goals
Sectoral funds should not be used for critical goals like retirement or child’s education. Stick to diversified funds.
4. Be Skeptical of Sales Pitches
If an agent is showing only past 1-2 year returns, ask for 10-15 year performance history.
5. Watch for Commission Bias
Understand that agents earn differently across products. Always ask: “Is this advice in my best interest or yours?”
6. Educate Yourself
A little reading about cyclical behavior of sectors can save you years of regret.
When Sectoral SIPs Make Sense
To be fair, sectoral SIPs are not inherently “bad.” They can be useful for:
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Tactical allocation: If you understand a sector cycle deeply (e.g., IT post-global digitalization).
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Diversification add-on: Small exposure to promising sectors alongside a diversified core portfolio.
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High-risk appetite investors: Those who can absorb long slumps without panic.
But these cases are rare among retail investors. For most, the risks outweigh the benefits.
Conclusion
The rise of SIPs in India has empowered millions to invest in equity markets with discipline. But the same popularity has been misused by SIP agents who push risky sectoral funds. By leveraging past returns, emotional narratives, and FOMO, they convince retail investors to enter products that may not align with their goals or risk tolerance.
While sectoral funds can deliver short bursts of high returns, they are cyclical, concentrated, and risky. For most investors, they should be treated as side bets, not core portfolio holdings.
The lesson is simple: SIPs are powerful, but only when applied to well-diversified funds with long-term vision. Don’t let sales pitches or FOMO lure you into sectoral traps. Remember—the purpose of investing is not to chase fads but to achieve financial security.
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