Thematic vs Sectoral Funds - Know the Difference

Thematic and sectoral funds are both types of mutual funds or exchange-traded funds (ETFs) that invest in companies in a specific industry or sector. The main difference between the two is that sectoral funds focus on companies within a specific industry, while thematic funds focus on companies that are related to a specific theme or trend. For example, a sectoral fund might invest in companies in the energy industry, while a thematic fund might invest in companies involved in renewable energy. Both types of funds can be more volatile than diversified funds, so they may not be suitable for all investors. It’s important to carefully consider your investment objectives, risk tolerance, and financial situation before deciding whether to invest in thematic or sectoral funds.

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 makes 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 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.

FAQs

Is it good to invest in thematic funds?

Whether or not it is good to invest in thematic funds depends on your individual financial goals and risk tolerance. Thematic funds are investment funds that focus on specific themes or trends, such as renewable energy, technology, or healthcare. These funds can offer the potential for higher returns compared to more traditional funds, but they also come with higher risks. Before making any investment decisions, it’s important to carefully research and compare different options and consult with a financial advisor.

Who should invest in sectoral funds?

Sectoral funds, also known as industry or sector-specific funds, are mutual funds or exchange-traded funds that invest in companies in a specific industry or sector. These types of funds can be a good option for investors who have a strong understanding of a particular industry and want to invest in companies within that industry. Because sectoral funds are focused on a specific industry, they can be more volatile than diversified funds, so they may not be suitable for all investors. It’s important for investors to carefully consider their investment objectives, risk tolerance, and financial situation before deciding whether to invest in sectoral funds.

Should I invest in thematic ETFs?

Thematic ETFs can be a good option for investors who are interested in investing in companies that are at the forefront of a particular trend or theme, and who believe that this trend or theme will continue to grow in the future. However, it’s important to keep in mind that thematic ETFs can be more volatile than diversified ETFs, so they may not be suitable for all investors. It’s always a good idea to carefully consider your investment objectives, risk tolerance, and financial situation before deciding whether to invest in any type of ETF.

What are high-risk mutual funds?

High-risk mutual funds are mutual funds that invest in assets that have the potential for high returns, but also come with a higher degree of risk. These types of funds may invest in stocks, bonds, commodities, or other types of assets, and may focus on a specific industry or market segment.

Is it good to invest in high risk mutual funds?

It depends on your investment goals and risk tolerance. High-risk mutual funds can potentially offer higher returns than other types of mutual funds, but they also come with a higher degree of risk. If you are comfortable with the idea of potentially losing some or all of your investment in exchange for the potential for higher returns, then high-risk mutual funds may be a good option for you. However, if you are risk-averse and are looking for a more stable investment, then high-risk mutual funds may not be the best choice. It may be a good idea to speak with a financial advisor to get guidance on whether high-risk mutual funds are a good fit for your investment portfolio.