What are thematic funds? Why did they come into existence? What are the benefits & risks of thematic funds? If you are seeking answers to these questions, you are probably at the right place.
This post is all about thematic funds. It discusses various important aspects of investing in thematic funds. Let’s get started!
Thematic Funds: Meaning & Explanation
A Thematic fund is a type of equity mutual fund designed around a specific theme.
Thematic funds focus on investing in companies tied to a specific theme (not a sector) such as renewable energy, rural development, sustainability, artificial intelligence, e-commerce, robotics etc.
FOR EXAMPLE, there are two companies from different sectors but both are leveraging artificial intelligence, they can be a part of an A.I. thematic fund.
Sidenote! Thematic funds allocate 80% of the investment towards equities & equity-related instruments. Hence, considered as highly risky investments.
Examples of some thematic funds in 2023
Based on past 5-year performances, here is a list of thematic funds.
|Name Of Fund||5 Year CAGR||Theme|
|SBI Magnum Equity ESG Fund||13.31%||ESG|
|Quant Infrastructure Fund||24.87%||Infrastructure|
|SBI Consumption Opportunities Fund||15.54%||Consumption|
|ICICI Prudential Dividend Yield Equity Fund||15.59%||Dividend Yield|
|Nippon India Consumption Fund||18.30%||Consumption|
|ICICI Prudential Infrastructure Fund||19.26%||Infrastructure|
|Quantum India ESG Equity Fund||16.47%||ESG|
Why Did Thematic Funds Come Into Existence?
The answer is quite simple. Different people have different interests, values & beliefs. Thematic funds are invented to cater for people who want a targeted approach to investments based on their interests and beliefs.
Hence, these funds came into existence to cater to the demand for investment opportunities in specific themes or ideas.
Sectoral Vs Thematic Funds
These two terms ‘sectoral funds’ & ‘thematic funds’ are used interchangeably but to be precise they are different from each other. Let’s explore some of the fine differences between these two.
1. Focus: Sectoral funds intensively concentrate on specific industries such as banking, healthcare, infrastructure etc.
On the other hand, thematic funds invest in companies from different industries that are leveraging a particular trend such as sustainability, green energy, artificial intelligence etc.
2. Investment Approach: In sectoral funds, managers analyse the fundamentals and prospects of companies within a specific sector to make investment decisions. This is a narrow investment approach that can lead to industry concentration risk.
Thematic funds investments are driven by a specific trend or theme. For example, if there is a trend of using artificial intelligence, various businesses from different industries leverage A.I. and show growth.
Then, fund managers pick companies taking advantage of this A.I. trend & compose an A.I. thematic fund. This approach escapes the industry concentration risk as thematic investments are made across multiple industries.
3. Performance Drivers: Sectoral funds are tied to the performance of the targeted sector. Any factor impacting the sector will consequently influence the fund’s returns significantly.
Thematic funds’ performance heavily relies on the success and adoption of the chosen theme, which may too experience an impact due to some specific factors.
Benefits Of Thematic Funds
Let’s explore what kind of benefits thematic funds offer. Below are discussed some of the chief benefits of these funds.
1. Focused Exposure
Thematic funds feature targeted exposure to a specific theme or trend. This allows individual investors to align their investments with their personal interests, values or beliefs.
2. Good Diversification
These funds offer good diversification by investing in multiple sectors & businesses. This drives the investment to reduce risk and increase the potential for stable returns.
3. Expert Management
Thematic funds are monitored by managers with expertise in a particular theme or trend. Hence, investors get expert management of the fund. It ensures that the fund is aligned with its primary purpose.
4. Potential for Higher Returns
If the chosen theme or trend performs well, thematic funds have the potential to generate higher returns compared to broader market indices or diversified funds.
Risks Involved In Thematic Funds
With so many benefits, thematic funds bring some risks with them. Below are discussed some of them.
1. Management Risk
The success of any thematic funds is highly dependent on the investment decisions made by the management team of the funds. Any wrong decision can disturb the actual investment purpose.
2. Lack of Track Record
Thematic funds created on new themes or trends may be relatively new or with limited historical data. The lack of track record makes it difficult for investors to assess the fund’s performance and the consistency of returns over different market conditions.
Thematic funds may show higher volatility compared to other traditional funds. The performance of the thematic fund can be impacted by short-term fluctuation triggered by market sentiments around the theme.
Who Should Invest In Thematic Funds
Thematic funds are equity funds with high risks and the potential for high returns. Hence, these funds may suit the following investors:
Important! This informational is based on common sense and for educational purposes. It should not be considered as an investment advice. It is better to consult a professional before making any decisions.
1. Investors with specific Interests
Obviously, thematic funds are designed to fulfil the needs of investors with specific interests or beliefs. Hence, they are good for this kind of investor.
2. Investors who are comfortable with risk
As discussed before, thematic funds carry a high level of risk, these funds are not recommended for risk-averse investors.
3. Investors who have a long-term investment horizon
Thematic funds often revolve around long-term trends or themes that may take time to fully develop. Investors with a long-term investment horizon may find thematic funds suitable.
4. Investors who want diversification
Investors who want further diversification in their portfolio & do not expose themselves to thematic funds can leverage these for diversification.
Considerations Before Investment
You should consider the following factors before investing your hard-earned money.
- Your Risk Profile
- Investment Horizon
- The Reputation of AMC
- The Experience & Expertise of Managers
- Past Performance & Consistency
- Associated Risks
- Expense Ratios & Charges
How To Invest
With the help of various available investment platforms, investing in thematic funds has become very easy.
- Register with any reputed online investment platform
- Open an account & complete KYC
- Research & select fund
- Choose the mode of investment i.e. lumpsum or SIP Investment
- Make the payment
- Review the performance periodically
Are thematic Funds Good?
Thematic funds are good or bad? It completely depends on an individual investor’s risk profile, investment horizon & expertise.
Are Sector Funds & Thematic Funds Different?
Yes, they are different from each other. While sector funds focus on a specific sector, thematic funds focus on a specific theme & may invest in multiple sectors.
What is the tax treatment of thematic funds?
Since thematic funds are equity funds, they are subject to taxes similar to equity funds.