What are Thematic Funds?

George recently spotted a golden investment opportunity in the Pharmaceutical sector. He is curious about taking the advantage of the equity wave. However, he lacks the basic investing acumen. He thinks venturing out in the waters would be pretty risky without proper knowledge.

You, like George, may desire to take advantage of such short-term opportunities but don’t know how to avail them. Here is the answer. You can go with the sector and thematic funds!

Sector funds and thematic funds belong to the category of equity mutual funds. These funds are a stark contrast to diversified equity funds. Sector funds specialize in specific sectors or industry like banking, pharma, information technology, land, energy, etc.

Thematic funds, on the other hand invest in stocks which are well-defined around a particular opportunity. These might almost look like sector funds but may contain several sectors. You may perceive these to be far more diversified than sector funds.

 

Meaning of Thematic Funds

Mutual funds provide an option to invest in different sectors via sectoral funds. For example, pharmaceutical funds specialize in pharma companies or banking funds specialize in investing in companies within the banking system. However, thematic funds are different from the sectoral fund.

Thematic funds are growth-oriented equity funds that focus on investing in a set of companies based (or closely-related) to a particular theme. They follow a top-down approach and target a broader macro-economic theme on which the fund manager features a good knowledge. Here, the thematic fund investors studies and understand the impact of structural shift in economics, political, technological, corporate or social trends on sectors, demographics etc which may reveal investable opportunities.

For the sake of an example, electric vehicles (EVs) can be considered a theme. Here, the thematic fund based on EVs do not just need to focus on one automobile industry, rather they can include a set of industries which are a part of the theme. For example- this theme may include companies from the automobile industry, battery industry, Metal companies involved in making battery parts like Graphite, Aluminium, Carbon, etc, auto-ancillaries industry or any other companies related to the EVs.

 

Difference between Sector Funds and Thematic Funds

Sectoral Funds

Thematic Funds

Sectoral mutual funds refer to that category of mutual funds which aim to invest predominantly in the companies working in the specified sector.   As per the SEBI categorization principles, a sectoral fund must invest a minimum of 80% in equity instruments of the companies in that particular sector. For example, a pharma fund will provide you with a focused investment exposure in companies in the pharmaceutical industry.   Thus, such funds are suitable when the investment outlook for that particular sector looks optimistic, as the fund manager will seek the investment opportunities with the confined universe of the companies in that sector only and hence, the investors may generate better returns from the expected uptrend thereon.

Thematic mutual funds carry a broader vision in terms of the investible universe and hence, aim to invest predominantly in the companies impacted by a specified theme.   In terms of the mandated investment exposure, the rules are similar to the sectoral funds and thematic funds need to invest a minimum of 80% in equity & equity related instruments of a particular theme.     Examples of thematic funds are consumption funds focusing on the consumption theme, special opportunities funds focusing on companies involved in corporate actions like IPOs, buyback, mergers, demergers, etc.

 

Advantages of Thematic Funds

Thematic funds can be said to have the following benefits:

• • Thematic funds are inherently additional gratifying as compared to diversified mutual funds.
  • As thematic funds supply a compact theme, they need a focused impact attributable to the  news or happenings in alternative non-related industries.
  • There are plenty of in public accessible widespread themes within the Indian market and thus, finding the correct investment chance isn’t a tricky task for investors. For instance, you’ll be able to use FYER’s thematic investment platform. This focuses on a top down investment approach with predefined macroeconomic themes. Such themes can be used to pick out valuable investment opportunities.
  • Thematic funds permit strategic exposure to the investor’s portfolio. Such themes represent the investor’s ideas and thoughts and its preferences.

 

Risks related to thematic funds

It is a cardinal truth, that no investment strategy is ideal. The same goes true with the thematic investments as well. By creating investments in thematic funds, you prefer a focused theme. This portfolio concentration makes these thematic funds relatively riskier over diversified mutual funds.

Moreover, there’s additionally an argument concerning thematic investments that says that investing in a concentrated idea that remains untested and under-appreciated, might not be a sound approach.

 

Growth prospects for Thematic Funds in India

 

The above graph shows that in one-year time frame, all the themes have given negative returns. PSU theme saw the deepest fall of 21 per cent returns. Besides, one-year is a short period to judge any equity fund.

However, the story changes completely when we take a look at the long-term perspective. Apart from the PSU theme, all other themes ended positive in the five-year period. Energy theme was the one which gained the most during this period, followed by the consumption theme.

 

Points to recollect before investing in Thematic funds

1. The valuation of that particular sector or themes must be attractive at the time of investment. Also, one must be sure that it is not overvalued at the time.
2. The mutual fund investment provide for a trigger. This helps, as it can act as a stop loss in case the investment value goes below 15% to 20%.
3. Must avoid investing in a particular sector or theme, when they are already at their peak.
4. Check for the sustainability of the business in a particular sector or theme.
5. And finally, take an assessment if you can really afford to lose it all in a particular sector or  fund if the worst happens.

 

Note: If the answer to the above is yes for you, then you can go ahead with your investments and if not, it is better to be avoided. It is highly advisable to consult your Fund Manager or Seasoned Broker about the investment risks and opportunities that these funds provide to take a reasonable call on this.