Services sector funds: Hold in satellite portfolio if risk appetite permits

Industry is the largest segment of India's economy, offers investment opportunities in multiple high-growth areas

Thematic and sectoral funds are popular with risk-tolerant investors seeking market-beating returns. While manufacturing has gained prominence due to the government’s push, the services sector is also gaining ground and can be rewarding to investors. Motilal Oswal Asset Management Company (AMC) recently launched the Motilal Oswal Services Fund to capture this potential.

 

“The service sector encompasses a range of industries benefiting from rising incomes, urbanisation and digital adoption. With structural tailwinds and improving export competitiveness, there is long-term potential across this sector,” says Bhalachandra Shinde, associate fund manager, Motilal Oswal AMC. 

 

While sector funds (pharma, IT and BFSI) are well known, broader-themed ones can offer more diversified exposure. The Nifty Services Sector Total Return Index delivered 22.5 per cent over the past five years.

 

Services-themed funds must invest at least 80 per cent of their corpus in shares of companies in the sector.

 

Expanding sector

 

Services is the largest segment of India’s economy. Its share in gross value added rose from 50.6 per cent in FY14 to 55.3 per cent in FY25, according to the Economic Survey of 2025. Rising per capita income is expected to boost demand for services, creating investment opportunities in the listed space.  Mutual funds can be an effective vehicle to tap it. “These funds offer access to multiple high-growth areas like private banks, IT services, technology platforms, pharmaceuticals, hospitals, diagnostics, and consumer-facing companies. Rising internet penetration, adoption of financial products, along with a young population engaging in aspirational consumption, will continue to boost services,” says Atul Shinghal, founder and chief executive officer, Scripbox. 

 

Weigh the risks

 

Unlike diversified flexicap funds, services funds are more concentrated. Moreover, they cannot take exposure to high-growth opportunities outside the services sector. 

 

With valuations in some areas appearing stretched, investors may need to stay invested longer to realise gains. “Sector/thematic funds have concentration risk. Also, chasing the recent performance in a theme may lead to suboptimal outcomes,” says S Sridharan, founder and chief executive officer, Wallet Wealth.

 

“Services funds may be prone to cyclicality. Investing in them requires market timing and sector knowledge,” says Shinde.

 

Approach with caution

 

Evolved investors with high risk tolerance may consider these funds. “Due to their inherent risks and volatility, they should be approached with caution. Services funds are best suited for investors with a high risk appetite. They should have a long-term investment horizon of around 5-10 years,” says Shinde.

 

Diversified equity funds already have significant exposure to services, so investors may not miss out much if they skip this thematic offering. “These funds are not recommended for conservative investors seeking stability or regular income. Investors already overexposed to financials and IT in their core equity funds may also avoid them,” says Shinghal.

 

Satellite allocation

 

A services fund should not be a core portfolio holding, nor should it be the first holding in a portfolio. 

 

“Services funds can become part of a satellite portfolio. Investors can allocate about 5-10 per cent of the overall portfolio to them,” says Sridharan.

 

Investors should enter these funds via the systematic investment plan route. “You must be willing to hold them for at least 5-7 years to allow the theme to play out across economic and policy cycles,” says Shinghal.