What are Thematic Funds: Meaning, Benefits & Investment Strategy

As the term, ‘thematic’ indicates, thematic funds invest in a particular theme, that is, they pick sectors and industries that are tied to an idea/theme. If there is a growing current for a specific theme emerging out of economic trends, then investing in the companies revolving around that theme can be rewarding. Thematic fund managers seek to make the most out of such windows of opportunity. It is an equity fund and is suited best for aggressive investors.

Understanding Investment Strategy of Thematic Funds

Fund houses often launch thematic fund schemes when they see there is an opportunity to invest and grow around a well-defined theme. To better understand the investment strategy of the thematic funds, investors must bear in mind the following attributes:

Thematic funds are a type of equity fund. As per the SEBI (Securities and Exchange Board of India) mandate, 80% of asset allocation must be to equities and equity-related instruments
They invest in various sectors and a wide array of companies that are centered around a specific idea or a theme. This theme/idea might show huge growth potential as a result of socio-political and macro-economic factors. For example, a thematic fund investing around a theme of rural development, the fund can invest in sectors of chemicals, fertilizers, automobiles, core agri-products, and others. These companies can belong to different sectors and capital sizes but can cater to the progress of one idea
This is a bit contrary to traditional investment methods where the investment categorizations are broadly over the capitalization size or sectors of the companies. Whereas, thematic funds give laser-focused exposure to stocks and sectors that are in sync with the theme that they aim for
Being unconventional, it can withdraw the benefits of an economic situation and pick a theme that is trending and invest accordingly. If the financial experts hit the right slot, the rewards can be benchmark beating and can fetch higher returns than other equity funds
With high return capabilities, they are a high-risk fund. As they are equity funds and focus on a theme, they can give skyrocketing returns, if markets favor them. However, during market head turns, the returns can be easily eroded incurring huge losses to the investor

Benefits of Investing in Thematic Funds

There are several benefits to investing in thematic funds. These benefits include:

Thematic funds allow investors to invest in specific themes or trends, such as clean energy or technology, which can provide potential growth opportunities.
These funds can provide diversification within an investment portfolio.
Thematic funds can be managed by experts who have in-depth knowledge of the specific theme or trend, which can help to generate higher returns.
These funds often have a long-term focus, which can help to smooth out market volatility and provide stability to an investment portfolio.
Investing in thematic funds can provide investors with access to a range of companies that are driving a specific theme or trend, which can be difficult to access through individual stock picking.

Overall, thematic funds can be a valuable addition to an investment portfolio, providing exposure to growth areas and helping to diversify an investment portfolio.

How Thematic Funds Work?

Thematic funds are investment funds that are focused on specific themes or trends, such as clean energy or technology. These funds invest in companies that are related to the specific theme, in order to capitalize on growth opportunities and generate returns for investors.

Thematic funds are managed by investment professionals who have expertise in a specific theme or trend. These managers research companies and select those that they believe will benefit from the theme and provide the potential for growth.

Investors can choose to invest in thematic funds through a variety of channels, such as mutual funds, exchange-traded funds (ETFs), or individual stocks. The investments in the thematic fund are managed by the fund manager, who makes decisions about which companies to invest in and when to buy or sell those investments.

The performance of a thematic fund is determined by the performance of the companies in the fund’s portfolio. If the companies in the fund’s portfolio perform well and the specific theme or trend grows, the value of the thematic fund may increase. On the other hand, if the companies in the fund’s portfolio underperform or the theme or trend loses momentum, the value of the thematic fund may decrease.

Overall, thematic funds provide investors with the opportunity to invest in specific themes or trends, while allowing the fund manager to make investment decisions on their behalf. This can provide investors with exposure to growth areas and potential returns, while also offering the benefits of professional management and diversification.

How are Thematic Funds Different from Sectoral Funds and Focussed Funds?

Thematic funds are often confused with sectoral funds or focussed funds while all three are completely different. Focussed funds invest in limited stocks that can belong to any capitalization or sector, and may not be unified by a specific theme. These stocks are favorites of fund managers either because of their good performance in the stock market or have huge futuristic growth potential. Sectoral funds, which are more likely to be misconstrued with thematic funds, invest in a particular sector and are confined to it. Thematic funds can invest in multiple sectors that are in alignment with the theme they are investing in.

For example, sectoral funds may invest in particular sectors like pharma, banking, real estate, energy, etc. whereas thematic funds function differently. Suppose the home loan rates are falling and experts expect a rise in demand for affordable housing, they can launch a fund around this theme. The fund may invest in companies of construction, cement, banking, financial services, paints, etc. Now banking and construction are two different sectors but here they are united by a theme.

Read More: Thematic vs Sectoral Funds

Points to Consider Before Thematic Investing

Investors looking for investment in thematic funds should bear certain factors in mind as mentioned below:

They are suitable for aggressive investors as market volatility is its primary constituent. It is further recommended for investors who are experienced enough to understand the market cycles and if exposure to specific ideas will offer optimum returns
Time for the market to invest in thematic funds. Buying at low cost and selling high is the motto but sometimes investors fall for thematic funds hearing the buzz. By this time, the profit-making cycle is already taking a back turn
It is advisable for medium to long term investment of 5-7 years at least and preferably 10 years
If you are an opportunistic investor whose goal is wealth creation from various cycles of market and economic trends then you may invest. Those who have in-depth knowledge of the market and the various macro-economic factors that influence it can consider these funds
Although international funds can provide global exposure, the play of external factors like currency can also have an impact on the returns

Wrapping it up:

Thematic funds are equity funds that invest in stocks of companies that are aligned to a predetermined theme. These underlying assets can fetch high returns if the investors get the right theme at the right time, otherwise, they are a risky venture. It is not only suitable for high-risk tolerant investors but also for seasoned investors who can judiciously exploit the sectors woven around a theme. Long-time active investors who are prudent enough to know which sectors will perform and what theme can play out can invest. It is equally important to monitor the market closely to know the timely entry and exit to make the most out of a limited profitable lifecycle before incurring losses.

FAQs

What is the meaning of thematic in a mutual fund?

A thematic mutual fund is a type of investment vehicle that focuses on a specific theme or trend. These funds invest in companies that are related to the fund’s chosen theme, such as clean energy or technology. Thematic mutual funds are designed to provide investors with exposure to a specific area of the market that is expected to experience strong growth. This can be an attractive option for investors who want to focus their portfolio on a particular theme or trend, rather than investing in a broad range of stocks and other assets.

What are the types of thematic mutual funds?

There are many different types of thematic mutual funds, and they can focus on a wide range of themes or trends. Some examples of common themes for thematic mutual funds include clean energy, technology, healthcare, and e-commerce. These funds can invest in a variety of different assets, such as stocks, bonds, and other securities. The specific types of assets that a thematic mutual fund invests in will depend on its chosen theme and the investment strategy of the fund manager. Some thematic mutual funds may invest in only a few specific companies, while others may invest in a broader range of companies within a particular sector or industry.

Who Should Invest in Thematic Funds?

Thematic funds can be a good investment for investors who have a specific interest or belief in a certain theme or trend, and who want to invest in companies that are expected to benefit from that theme. These funds can be particularly attractive to investors who are looking for potential long-term growth opportunities, and who are willing to accept a higher level of risk in exchange for the potential for higher returns. However, it’s important for investors to carefully research and evaluate a thematic fund before making any investment decisions, to ensure that it aligns with their investment objectives and risk tolerance.

What are examples of a thematic fund?

Some examples of thematic funds might include a clean energy fund that invests in companies involved in renewable energy production or a technology fund that invests in companies involved in the development of emerging technologies such as artificial intelligence and machine learning. Other examples of thematic funds could include funds focused on healthcare innovation, the growth of e-commerce, or the rise of the gig economy.

Is thematic investing a good idea?

Thematic investing, which focuses on a specific trend or theme, can provide potential long-term growth opportunities. However, investors should carefully research and evaluate thematic funds before investing, as they may involve higher levels of risk.