Thematic funds are a unique category of mutual funds that focus on specific themes or trends in the market rather than following traditional investment strategies. Unlike diversified equity funds, which invest across various sectors, thematic funds concentrate on particular sectors, industries, or themes. These funds aim to capitalise on emerging trends or potential growth areas within the economy.
How do thematic funds work?
Thematic funds operate by identifying and investing a minimum of 80% in sectors or themes expected to experience significant growth or transformation in the future. Fund managers analyse market trends, technological advancements, regulatory changes, and consumer behaviour to identify these themes. Once identified, the fund invests in companies related to the chosen theme or sector, aiming to benefit from their growth potential.
Key features of thematic funds
1. Enhanced Diversification:
Thematic funds provide a broader scope for diversification compared to sectoral funds. They invest in stocks across multiple sectors, offering investors exposure to diverse industries within a single fund.
2. Potential for Lucrative Returns:
By selecting a specific theme and timing market entry effectively, investors have the potential to reap significant returns. Thematic funds capitalise on emerging trends and sectors, presenting opportunities for profitable investments.
3. Varied Market Capitalisation:
Thematic funds offer flexibility in terms of market capitalisation. Investors can allocate funds across companies of different sizes, including large-cap, mid-cap, and small-cap stocks, based on the chosen thematic focus.
Benefits of investing in thematic funds
Listed below are some benefits of investing in thematic mutual funds:
- Diversification: Thematic funds offer investors exposure to specific sectors or themes that may not be available in traditional diversified equity funds. By investing in thematic funds, investors can diversify their portfolios and reduce overall investment risk.
- Potential for market-beating returns: Thematic funds focus on niche sectors or emerging trends that have the potential to deliver higher returns compared to broader market indices. By targeting sectors with growth potential, thematic funds may outperform the broader market over the long term.
Who should invest in thematic funds?
Given below is a list of which type of investor should invest in thematic mutual funds:
Investors with high-risk appetite: Thematic funds are suitable for investors willing to take higher risks in exchange for the potential of higher returns. Since these funds focus on specific themes or sectors, they may experience higher volatility compared to diversified equity funds.
- Investors seeking long-term returns: Thematic funds are ideal for investors with a long-term investment horizon. These funds require patience and conviction, as the themes or sectors they invest in may take time to materialise and generate significant returns.
- Well-informed and evolved investors: Thematic funds are best suited for investors who understand the dynamics of specific sectors or themes and can evaluate their growth prospects effectively. Investors should stay informed about market trends and economic developments to make informed investment decisions in thematic funds.
Risks associated with thematic funds
Although the advantages of engaging in thematic funds might seem enticing, it's essential to grasp the associated risks, particularly their tendency towards concentrated risk exposure.
Thematic funds carry similar risks to other types of mutual funds, including susceptibility to interest rate fluctuations, absence of guaranteed returns, and the potential for the principal amount to decline due to market volatility, shifts in government policies, and political developments. These risks stem directly from the volatility of the equity market and include the following:
- Risk of total loss: Investments in thematic and related securities may result in a complete loss of the principal amount.
- Price risk: Market conditions can cause daily fluctuations in prices.
- Liquidity risk: Settlement periods may unexpectedly prolong, and selling may be constrained due to the overall trading volume of specific stocks in the portfolio. This constraint can lead to potential losses and a decrease in the scheme's value.
- Event risk: Any unforeseen or adverse event affecting an industry or company in which the mutual fund is invested can contribute to price risk.
Difference between thematic funds and sector funds
Feature | Thematic Funds | Sector Funds |
Investment focus | Target a broad theme or trend across various sectors. (e.g., healthcare, clean energy, technology disruption) | Focus on a specific industry or sector. (e.g., banking, pharmaceuticals, information technology) |
Underlying assets | Invest in companies from different sectors that align with the chosen theme. | Primarily invest in companies belonging to a single, pre-defined industry. |
Diversification | Generally considered more diversified due to exposure across multiple sectors. | Less diversified, potentially leading to higher risk if the chosen sector underperforms. |
Risk profile | Risk level can vary depending on the theme's underlying assets, but generally considered moderately risky. | Risk tends to be higher due to concentration in a single industry. |
Investment horizon | Often suitable for long-term investors who believe in the theme's long-term potential. | May be suitable for medium to long-term investors with a strong understanding of the chosen sector. |
Example | A healthcare thematic fund might invest in pharmaceutical companies, medical device manufacturers, and healthcare IT firms. | A banking sector fund would primarily invest in shares of various public and private banks. |
Points to consider before investing in thematic funds
Before investing in thematic funds, investors should consider the following points:
- Research and understand the theme: Investors should thoroughly research and understand the theme or sector the thematic fund focuses on. Understanding the underlying factors driving growth in the chosen theme is essential for making informed investment decisions.
- Evaluate fund manager expertise:Assess the track record and expertise of the fund manager managing the thematic fund. A skilled and experienced fund manager can effectively identify investment opportunities and navigate market fluctuations.
- clarify investment goals:Before delving into thematic funds, it is imperative to define your investment objectives clearly. Achieving optimal returns from thematic funds typically requires a long-term investment horizon of over 5 years. This extended timeframe aligns with the nature of thematic investments, which often require significant time to reach their peak potential. Therefore, investors should align their goals with long-term aspirations such as early retirement or funding a child's education.
- Assess investment risks:While the allure of thematic funds may be strong, it's crucial to acknowledge the associated risks. Thematic funds are inherently high-risk vehicles, making them less suitable for novice investors. Key risks to consider include:
- Semi-diversified portfolio:Thematic funds offer a degree of diversification, albeit less than multi-cap funds, as they focus on specific themes rather than various sectors. Consequently, the risk of simultaneous downturns in all holdings is higher compared to broader equity funds.
- Extended theme realisation periods:Investors should recognize that themes may take longer than anticipated to materialise. Despite optimistic projections, certain themes may require more time to yield substantial returns. For example, the infrastructure theme, popular in 2007, has yet to fully materialise even after a decade, illustrating the potential extended realization periods for thematic investments.
Evaluate expense ratios:Investors should be cognizant of the expenses associated with thematic funds, particularly the expense ratio. This fee, charged by asset management companies (AMCs), covers administrative and operational costs such as fund management fees and marketing expenses. It's essential to understand these fees, as they directly impact overall returns and should be factored into investment decisions.
Taxation on thematic funds
Thematic funds are subject to taxation similar to other equity mutual funds.
- Short-term capital gains (profits earned on investments held for less than one year) are taxed at a rate of 15%. Read more about, What is short term capital gain tax.
- Long-term capital gains (profits earned on investments held for more than one year) exceeding Rs. 1 lakh are taxed at a rate of 10% without indexation. Read more about, What is long term capital gains tax.
How can you invest in thematic funds on the Bajaj Finserv platform?
- Step 1: Visit the Bajaj Finserv website or download the app from Google Play Store or App Store
- Step 2: Navigate to 'Investments' and click on 'All Investments' on the home page
- Step 3: Click on 'Mutual Funds' icon
- Step 4: Click on 'Explore Funds'. You will be redirected to the mutual funds listing page
- Step 5: Filter by scheme type, risk appetite, returns, etc. or choose from the top performing funds list
- Step 6: All the mutual funds of the particular category will be listed, along with the minimum investment amount, annualised return, and rating
- Step 7: Click on 'Invest Now'
- Step 8: Enter your mobile number and sign in using the OTP
- Step 9: Verify your details using your PAN, date of birth. If your KYC is not complete, then you will have to upload your address proof and record a video
- Step 10: Enter your bank account details
- Step 11: Upload your signature and provide some additional details to continue
- Step 12: Choose and select the mutual fund that you want to invest in
- Step 13: Choose whether you want to invest as SIP or lumpsum and enter the investment amount. Click on ‘Invest Now’
- Step 14: Select your payment mode i.e., net banking, UPI, NEFT/ RTGS
- Step 15: Once your payment is done, the investment will be complete
Your investment will start reflecting in your portfolio within 2-3 working days.
Conclusion
Thematic funds offer investors an opportunity to capitalise on specific market trends and emerging themes. While these funds can potentially deliver market-beating returns, they also involve higher risk due to their focused investment approach. Investors should carefully evaluate their risk tolerance, investment goals, and understanding of thematic themes before investing in thematic funds. By conducting thorough research and seeking professional advice, investors can make informed decisions and potentially benefit from the growth opportunities offered by thematic funds.
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