Thematic vs Sectoral Funds – Know the Difference

Thematic vs Sectoral Funds

Thematic vs Sectoral Funds is a common question among investors. Thematic and sectoral funds are often confused with and compared to each other because they both are quite specific in their asset allocation. Both of them also have many things in common, such as both these funds are equity funds and have high market volatility. However, there is one major factor that brings about the fundamental difference between the two, which is their investment strategy. Thematic funds invest in multi-sectors that can suit a theme while sectoral funds are restricted to a particular sector. Let’s discuss this in detail by comparing the two types of funds.

What are Sectoral Funds?

Sectoral funds are sector-specific funds that invest in stocks of companies belonging to one particular sector. They are equity funds as they majorly invest in stocks and the equity segment of the market. They are high-risk mutual funds and are suitable for long-term investment where a particular sector realizes its value. It can offer maximum returns if investors crack the right sector for investment.

What are Thematic Funds?

Thematic funds are equity mutual funds that invest according to a theme that is expedited to grow in upcoming times. These funds invest in sectors, industries, and stocks of companies that will boost that theme or idea. They are suitable for aggressive investors with a long-term horizon.

Sectoral Funds Vs Thematic Funds

Investors who find themselves in a fix wondering how sectoral funds and thematic funds are different, here we bring both the similarities and dissimilarities between the two. The commonalities between these two will help understand why they are weighed against each other. The differences, on the other hand, shall make it clear to the readers how they are not the same.

Similarities

The similarities between sectoral funds and thematic funds are:

  • Both are equity funds and as per the mandate of the SEBI (Securities and Exchange Board of India), they must allocate 80% of the assets to equities
  • The investments in both types of funds are done in stocks of all capital sizes, that is, large, medium, and small-sized companies
  • Both sectoral and thematic funds are meant for high-risk investors as these funds are equity funds plus they focus on a theme or a sector. They come with market risks coupled with concentration risks
  • Sectoral funds, as well as thematic funds, can provide optimum returns in the long term if investors find the right opportunity. If they invest in a sector that is expected to grow or a theme that strikes right, they can reap good returns. It is important to time the market and make timely entry and exit in these fund investments

Dissimilarities

The differences between sectoral and thematic funds are:

  • Sectoral funds focus on a sector while thematic funds focus on a theme and not a sector or an industry. They may invest in many sectors that relate to a theme
  • Thematic funds are broader than sectoral funds as they are in multiple sectors, unlike sectoral funds. This makes thematic funds more diverse with lesser concentration risks than the sectoral funds

Who Should Invest?

Investors should take care that the fund’s objectives, recommended tenure, and riskometer aligns with their goals, investment horizon, and risk appetites. So, investing in sectoral or thematic funds has certain prerequisites:

  • Sectoral funds are a chance to make the most of an emerging sector when they are undervalued. While thematic funds exploit the potential of various sectors that favors an emerging theme. Therefore, it is a bet to invest in undervalued stocks in both cases
  • If a theme/sector is set right, these funds can give a high yield that traditional mutual funds may not be able to offer. They can make the best use of some disruptive trends in the market
  • Both of them are tricky as they are launched when the valuations of sectors/themes are steep making them risky investments. At the same time, these funds cannot be completely judged by the past records as these sectors/themes might have realized their full potential by that time
  • Because of the factors mentioned above, it is important to time the market as they are usually launched during a market rally and investors find themselves struggling when to invest. If investors seek to invest when they start offering good returns, it is a possibility that thereafter the returns may go down. This is because sectoral and thematic developments are cyclic and by the time they catch the investor’s attention, they are ready to go downwards from their peaks of growth
  • These funds are not only meant for aggressive investors with long-term horizons but also seasoned ones. Those who actively follow the market, have its knowledge as well as an in-depth understanding of various macro-economic factors that influence the market trends
  • Both funds can be used to hedge the investment portfolio where they can safeguard against losses. Diversity in the portfolio is the biggest hedge and adding a couple of sectoral or thematic funds can help in it. At times, when some sectors/themes can offer higher than average returns, investors can leverage by sneaking into the right opportunities for growth. As mutual funds are professionally managed, fund managers use the latest analytical tactics to maximize the returns

Wrapping it up:

Sectoral funds invest in a specific sector like pharma, banking, real estate, etc. On the other hand, thematic funds invest in a theme that is about an idea or a goal encompassing multiple sectors. Both funds are high-risk-return equity funds where thematic funds offer slightly higher diversity than sectoral funds. These kinds of funds are about being opportunistic to take advantage either of a growing sector or sectors around a growing theme. If investors hit the right spot, they can earn high returns. Although the fund managers who are finance experts ensure the consistency of the returns, investors must also thoroughly research to understand the vagaries of the financial markets.

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