A sectoral fund invests almost exclusively in companies from one specific industry — such as banking, IT, or pharmaceuticals — while a thematic fund invests around a broader idea or trend, like infrastructure, consumption, or manufacturing, which might span several related sectors. Both types deliberately avoid the broad diversification that a typical large-cap or flexi-cap fund offers.
Because these funds are concentrated rather than diversified, their returns can be considerably more volatile — they may outperform dramatically when their chosen sector or theme is in favour, but can also underperform sharply when it falls out of favour. These funds are generally considered higher-risk and are better suited as a smaller, tactical portion of an experienced investor's portfolio, rather than as a core, primary holding.
These funds tend to work best as a small, satellite allocation on top of a diversified core portfolio, rather than as your primary or only equity holding.