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 it. However, during market head turns, the returns can be easily eroded incurring huge losses to the investor
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, 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 the 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.
Points to Consider Before 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.