What is a Thematic Investment Fund?

A thematic fund is a type of mutual fund that focuses on investing in companies associated with specific themes. While traditional mutual fund schemes invest across various sectors to achieve broad market exposure, thematic investment funds focus their investments in specific industry sectors aligned with a particular theme or trend. They offer investors exposure to specific sectors or themes that they believe will potentially outperform the broader market.

• Table of contents

1. How do thematic funds work?
2. Features of thematic funds
3. What are the benefits of investing in thematic funds?
4. Who should invest in a thematic fund?
5.  factors to consider before investing in thematic funds

How do thematic funds work?

Mutual funds invest in underlying assets that generate returns. Large-cap funds focus on stocks of major companies, while thematic funds target companies united by a specific theme, like ESG factors. Thematic funds are invested across various sectors and market caps as long as they align with their theme, with SEBI requiring at least 80% of equity-related assets related to the theme.

Features of thematic funds

Theme-based investment approach: Thematic funds follow a focused investment approach and concentrate their investments in sectors or themes expected to exhibit a strong growth potential. These themes may include industry sectors such as technology, healthcare, infrastructure, consumer goods, energy, etc., or themes such as e-commerce, electric vehicles, artificial intelligence, etc.

Higher risk: Thematic funds are subject to relatively higher levels of risk and volatility compared to diversified equity funds since their performance is closely linked to the performance of the underlying sector or theme.

Sectoral exposure: They provide investors with targeted exposure to specific sectors or themes that may not be adequately represented in diversified equity funds. By investing in thematic equity funds, meaning equity funds targeting a sector or theme, investors can gain exposure to sectors that they believe will outperform the market.

What are the benefits of investing in thematic funds?

• More diversification than sectoral funds: Thematic funds offer relatively better diversification by investing in multiple sectors related to a central theme, which may lessen the impact of underperformance in any single sector.
• Potential for high returns: If the chosen theme performs well, thematic funds might deliver strong returns. However, picking the right theme requires thorough research and ongoing monitoring.

Who should invest in a thematic fund?

You can invest in a thematic fund if:

• You want to capitalise on a specific industry or theme.
• You are willing to bear the higher level of risk in exchange for a higher growth potential.
• You have a longer investment horizon since thematic investing may take a longer time to generate growth.
• You want to invest in a specific industry sector or theme you are enthusiastic about.
• You want your portfolio to gain exposure to themes or sectors not adequately represented in traditional asset classes.

 factors to consider before investing in thematic funds

Before investing in thematic funds, consider their focus on specific sectors or themes, associated risks, and the need for thorough research and regular monitoring to align with your investment goals. Some of the important factors to consider before investing in thematic funds are mentioned below:

Investment horizon: Investors should align their investment objectives and horizon with the thematic fund before adding it to their existing investment portfolio. Since thematic funds invest in sectors that have an explosive growth potential in the future, a longer investment horizon is desirable.

Risk tolerance: Thematic funds are subject to a relatively higher level of risk and volatility compared to other types of mutual funds as they provide targeted exposure to specific sectors or themes. Investors should assess their risk tolerance before investing in thematic funds since there may be significant fluctuations in the short term.

Research and due diligence: Before investing in thematic investment funds, investors should conduct thorough research to understand the underlying sector dynamics and investment approach of the fund manager as well as the specific sector.

Performance monitoring: Investors should regularly monitor the performance of thematic funds and assess whether the underlying sector or theme remains relevant over time. It's essential to review the fund's performance relative to its benchmark and peer group to evaluate its effectiveness in potentially achieving the investment objectives.

Conclusion

To summarise, thematic funds offer investors opportunities for a higher growth potential than regular equity funds. However, since thematic investment funds provide targeted exposure to specific sectors or themes, investors should also consider the associated risks and conduct thorough research before making investment decisions. Investors must strive to maintain a diversified investment portfolio across asset classes and investment styles to mitigate risk and enhance overall stability of the portfolio.

FAQs:

What is a thematic fund?

thematic fund is a type of equity mutual fund that invests in stocks of companies related to a particular theme or industry sector. It aims to capitalise on growth opportunities within the targeted sector or theme.

How to pick the right thematic fund?

The first thing you must do before making any investment, including in a thematic fund, is to understand your investment goals. Then, you must research different themes or sectors you are interested in and find mutual fund schemes targeting those themes or sectors. Read the scheme documents and compare different themes before making the investment.

Are thematic investment funds riskier than other equity mutual funds?

The returns from thematic funds depend on the performance of a specific industry sector or theme. Therefore, the effects of adverse events within the sector or theme on the portfolio can be amplified. Maintaining a well-balanced portfolio and holding the thematic fund for a long time can potentially help mitigate the risks.

What is the difference between sectoral and thematic funds?

Sectoral funds invest exclusively in companies within a specific sector, like technology or healthcare. Thematic funds, however, invest in a broader range of sectors based on a central theme, such as sustainability or innovation, offering more diversification within the theme.

How many shares of a portfolio should be invested in thematic funds?

The proportion of your portfolio invested in thematic funds depends on your investment strategy and risk tolerance. It’s important to balance thematic funds with other investments to manage risk effectively.

What are the types of thematic mutual funds?

Types of thematic mutual funds include those focused on themes such as technology, healthcare, environmental sustainability, or emerging trends like artificial intelligence. Each type invests based on a specific theme or trend.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.