New investors are often confused about concentrating on conservative investment options or switching to aggressive new age investments like mutual funds. However, if you are good at financial planning, then you may know which one to choose. Financial planning is the art of managing money and distributing your finances by using an applied investment strategy. Different investors pick different strategies to invest in, and one such strategy is to focus on theme-based investments.
If an investor wants to invest his/her money based on a theme rather than going after caps or styles, then themed mutual funds can be an ideal choice. They offer plans for the short term and long-term investing with comparatively positive returns.
Here, we will cover details on Thematic funds such as meaning, features, benefits, top thematic funds, etc, to help new investors explore this form of investment and make the most of it.
What are thematic funds?
Thematic funds are mutual funds that have an investment strategy focused on stocks of multiple sectors. Under this, stocks from different sectors are woven together as per a determined theme. These funds invest in sectors with themes such as rural consumption, international market, export-oriented, etc.
Sectoral and Thematic funds are terms that are often confused between by investors. However, they differ greatly from each other, although both fall under the mutual fund category. Sectoral funds invest in one sector at a time, and thematic funds invest in multiple sectors that are combined within a certain theme.
Comparing sectoral funds and thematic funds
Here are some differentiating features of sectoral and thematic fund:
| Thematic funds | Sectoral funds |
| Thematic funds invest in sectors with different themes such as multi-sector, international, export-oriented, rural sector, etc. | Sectoral funds generally invest in specific sectors at a time, such as, natural resources, real estate, health care, technology, finance, communication, refined metals, etc. |
| Thematic funds are considered to be comparatively risky since they invest in equity. | A sectoral fund aims at offering investors with exposure to a chosen sector and therefore, the risk factor is concentrated. |
| Investors with a long term investment horizon can invest in Thematic funds for better returns. | Individuals who have a moderate risk appetite and are looking for capital appreciation through indirect equity investments can invest in Sectoral funds. |
How do thematic funds work?
Mutual funds have an underlying asset class that can fetch returns. Take, for example, large-cap funds where the underlying assets are the stocks of large and established companies in terms of market capitalization. On the same lines, thematic funds invest in stocks of companies that are chosen as per a predetermined theme, and these become the underlying assets of the mutual fund.
Let’s understand this better with an example. Suppose a fund is following an ESG theme. It will invest in companies that are top-performers in the environmental, social, and (corporate) governance factors and belong to different sectors (like technology, financial services, FMCG, etc).
This differentiates thematic funds from the conventional mutual funds that only look at factors like market capitalization, style, and sectoral focus. Thematic funds invest across different sectors and various market caps that tie back to the theme.
What is the thematic index?
Thematic indexes are emerging as a new and effective way to analyse the behaviour of a thematic fund. It takes into consideration the dynamic changes of the market rather than relying on the traditional performance trackers. Thematic indexes are commonly used to track the performance of broad investment themes that are popular in the investment horizon.
Who should invest in thematic mutual funds?
Before investing in Thematic mutual funds, investors must consider the following factors and assess their suitability accordingly:
High-risk tolerance
Thematic mutual funds may offer comparatively higher returns, but these are also among the riskiest investment alternatives. Hence, investors who can take on risks associated with thematic funds can invest in these.
Accompanied restriction
Since the investment is bound to a specific theme, it could pose some restrictions on the investor’s available options. Once a theme is finalised, the funds cannot be invested in any stock that falls outside of the spectrum of the selected theme. Therefore, investors must look for a theme that offers a wide range of subdivisions or covers a long list of investment avenues.
Feasible with varying maturity
Themed mutual funds offer good results in short-term investments. However, they can be a good choice for long-term investments as well. This is backed by the idea that stocks associated with a specific theme may take substantial time to reach their full potential.
Experienced investors
Themes mutual funds offer decent returns on the investment made, but they are not tailor-made for investors who are new to the share market. Investors who have been trading for some time and are aware of the basic stock market functioning should consider moving towards the themed mutual funds.
What are the risks associated with themed mutual funds?
While themed mutual funds are lucrative for the returns they offer, there are certain risks associated as well. Listed here are some of them:
Semi diversified portfolio
Although themed mutual funds fall under equity funds, they offer restricted diversification in their portfolio. This aspect covers various instruments of investment such as cash, bonds, stocks and others. The movement among all these instruments is restricted with themed funds.
Patience testing
Although a themed mutual fund may have been offering great returns historically, the market trends keep on changing. Hence, an investor may have to be patient and wait a little longer than expected to get substantial gains from the investment made.
Thematic fund recommendations
Here are some of the top-performing fund recommendations under this category:
About the Fund
The scheme aims to offer capital appreciation to investors by primarily investing in equity and equity-related instruments. It invests in stocks of companies that derive a majority of their income from the services sector.
| Inception Date | September 21, 2018 |
| Benchmark Name | NIFTY Service Sector Total Return Index |
| Fund Manager | Rahul BaijalRohit Seksaria |
| Expense Ratio | 0.92% |
Historical Returns of the Fund (annualised)
| 1-Year | 2-Year | 3-Year | Since Inception |
| 47.26% | 29.90% | 27.72% | 26.49% |
b. Aditya Birla Sun Life MNC Fund
About the Fund
The scheme aims to invest mainly in securities of multinational companies. It seeks to achieve long term capital growth at relatively moderate risk levels. It also invests in IPOs and other primary market offerings.
| Inception Date | January 01, 2013 |
| Benchmark Name | NIFTY MNC Total Return Index |
| Fund Manager | Ajay Garg |
| Expense Ratio | 1.31% |
Historical Returns of the Fund (annualised)
| 1-Year | 2-Year | 3-Year | 5-Year | Since Inception |
| 11.22% | 11.92% | 9.79% | 12.58% | 16.42% |
Conclusion
For investors who are planning on investing in thematic funds, it is important to ensure that they do adequate research on these types of funds and consider investing in those funds that have a positive historical track record.
FAQs
- Is there any difference between Sectoral and Thematic funds?
Yes, both are distinct varieties of mutual funds. While sectoral funds invest in stocks of only a single chosen sector, Thematic funds invest in stocks of various sectors that fall under a specific chosen theme.
- Is it safe to invest in Thematic funds?
Yes, Thematic funds are safe to invest in. However, investors must note that these funds come under the moderately high-risk category and require a thorough understanding of the theme chosen by the fund. Hence, an investor should ideally be an aggressive one to constantly study market movements while being invested in Thematic funds.
- How much percentage of my investment portfolio should I invest in Thematic funds?
While the exact percentage allocation may depend on individual preference, investors should try to restrict Thematic funds to 5-10% of the total portfolio.
- Are Thematic funds good to invest?
Thematic funds can be beneficial to those who are looking for medium to long-term investments. This is because an investor may have to pull out if the fund does not do well. Additionally, an investor must be well-versed with the market trends to make informed decisions around thematic fund investment.
