Equity Funds — Sectoral & Thematic, ELSS
Sectoral and Thematic Funds concentrate on one sector or one theme, and an ELSS is an equity fund with a 3-year lock-in that qualifies for a tax deduction. This lesson covers their portfolio rules, their main risks and how the ELSS deduction works.
Sectoral and Thematic Funds
A Sectoral Fund holds at least 80% of its assets in equity and equity-related instruments of one sector, such as banking, pharmaceuticals or information technology. A Thematic Fund holds at least 80% in a theme that can span several sectors, such as consumption or manufacturing.
The two are separate categories. A fund house may run several sectoral or thematic funds, provided each is on a different sector or theme; this is one of the three exceptions to the one-scheme-per-category rule. Portfolio overlap between a sectoral or thematic fund and other equity schemes is capped at 50%.
Concentration: the main risk
Because so much of the portfolio sits in one sector or theme, a downturn there affects the fund more than it would a diversified equity fund. A diversified fund holds many sectors, so weakness in one may be offset by others.
A theme is wider than a single sector, but it is still narrower than the whole market, so a Thematic Fund carries the same kind of risk.
ELSS and its lock-in
An ELSS (Equity Linked Savings Scheme) holds at least 80% in equity. Its units are locked in for 3 years from the date of allotment and cannot be redeemed before then. A passive, index-based ELSS is also allowed.
With a SIP, each instalment is a separate purchase and is locked in for 3 years from its own allotment date. The lock-in limits access to the money; it does not limit market risk. An ELSS is an equity fund, and its value at the end of three years can be lower than the amount invested.
The ELSS tax deduction
Investment in an ELSS qualifies for deduction under section 123 of the Income-tax Act, 2025 (Section 80C of the old 1961 Act). The limit is ₹1.5 lakh a year and is shared by all eligible items; there is no separate limit for ELSS.
The deduction is available only to taxpayers who choose the old tax regime, not under the new regime. It reduces the income on which tax is worked out. Gains on redeeming ELSS units are still taxed, under the rules for equity-oriented funds.
Rules at a glance
One sector against many (illustrative arithmetic)
Assume a diversified equity fund holds 10% of its portfolio in pharmaceutical shares, while a pharmaceutical Sectoral Fund holds 90%. Suppose pharmaceutical shares fall by 20% on average and every other holding is unchanged.
The diversified fund falls by about 10% × 20% = 2%. The Sectoral Fund falls by about 90% × 20% = 18%. The same arithmetic works in the other direction when the sector rises.
ELSS: the shared limit and the SIP lock-in (assumed figures)
- Assume Kavita has chosen the old tax regime. In one tax year she has ₹90,000 of other eligible items and also pays ₹80,000 into an ELSS through a monthly SIP.
- Total eligible amount: ₹90,000 + ₹80,000 = ₹1,70,000.
- The limit under section 123 is ₹1,50,000 for all eligible items together, so her deduction is ₹1,50,000. The excess, ₹1,70,000 − ₹1,50,000 = ₹20,000, earns no deduction.
- Lock-in: one of her instalments is allotted in April 2026 and another in March 2027. The first completes its 3 years in April 2029 and the second in March 2030.
Result. Her deduction is capped at ₹1,50,000 however much she puts into eligible items, and each SIP instalment can be redeemed only after its own three years are over.
Key points
- A Sectoral Fund holds at least 80% in equity of one sector; a Thematic Fund holds at least 80% in a theme that can span several sectors.
- A downturn in the chosen sector or theme affects these funds more than a diversified equity fund.
- A fund house may run several sectoral or thematic funds if each is on a different sector or theme.
- An ELSS holds at least 80% in equity and has a 3-year lock-in; each SIP instalment is locked in from its own allotment date.
- The ELSS deduction is under section 123 of the Income-tax Act, 2025, up to ₹1.5 lakh a year across all eligible items, and only under the old tax regime.
Common misunderstandings
- The lock-in on an ELSS SIP is not counted from the first instalment: each instalment has its own 3 years from its allotment date.
- The ₹1.5 lakh limit is not separate for ELSS: it is shared with all other eligible items under section 123.
- A lock-in is not protection: an ELSS is an equity fund and can be worth less after three years than the amount invested.
Questions people ask
How does a Thematic Fund differ from a Sectoral Fund?
A Sectoral Fund holds at least 80% in one sector, such as banking. A Thematic Fund holds at least 80% in a theme, such as consumption, that can cut across several sectors.
Can a fund house offer more than one sectoral fund?
Yes, provided each is on a different sector. Sectoral and thematic funds on different sectors or themes are an exception to the one-scheme-per-category rule.
Can an ELSS be an index fund?
Yes. A passive, index-based ELSS is allowed. It carries the same 3-year lock-in and the market risk of its index.
What this lesson relies on
- SEBI Master Circular for Mutual Funds (20 March 2026) — Chapter 3, categorisation of mutual fund schemes
- SEBI circular of 26 February 2026 on categorisation of mutual fund schemes
- Income-tax Act, 2025 — section 123 (Section 80C of the Income-tax Act, 1961)
This lesson was reviewed independently against these sources on 8 October 2026. Rules change: check the current regulation, scheme document or policy wording before relying on any figure. This is education, not advice.