Learn what makes thematic funds different from regular mutual funds
Imagine investing in a way that not only aligns with financial goals but also with changing trends. Whether it’s the rise of green energy, the digital revolution or the rise in household consumption, thematic mutual funds open the door to opportunities linked to these big ideas. By targeting companies that directly benefit from such themes, these funds allow investors to bet on the future — often across industries but under a unified narrative.
In India, theme-based mutual funds are gaining traction as they allow investors to ride the wave of emerging trends like renewable energy, public sector growth or even multinational leadership. However, as exciting as these opportunities may seem, they demand careful consideration of the associated risks. Let us know how these funds work, their benefits and what makes them different from traditional investments.
What are Thematic Funds?
According to the Association of Mutual Funds in India (AMFI), thematic mutual funds are specialized mutual fund schemes that focus on investing in companies aligned with a particular theme or trend. These themes often revolve around industries, ideas or structural changes expected to experience growth, such as clean energy, technology or consumption.
Unlike sectoral funds, which focus on a single industry, thematic funds are diversified across multiple industries but within the boundaries of a chosen theme.
In India, popular themes include dividend yield, PSUs (Public Sector Undertakings), MNCs (Multinational Corporations), energy and consumption. Additionally, specific themes such as manufacturing, exports, services and transportation are also featured albeit with fewer fund options.
These funds are actively managed, offering investors the opportunity to benefit from high-growth trends while aligning their investments with personal beliefs or values. However, their focused approach comes with high risks, requiring thorough evaluation and consultation with financial advisors.
How does thematic investing work?
Thematic investing capitalizes on the belief that certain trends or industries will outperform others over time. By identifying these structural or macroeconomic changes early, thematic funds aim to invest in companies that will directly benefit. For example, a thematic fund targeting renewable energy might include companies in solar power, wind power and battery storage technology.
Fund managers actively select and manage portfolios that align with themes, often cutting across traditional sector boundaries to maximize target trends.
Advantages of investing in thematic funds
Exposure to high-growth sectors
These funds provide entry into sectors poised for significant expansion. For example, renewable energy funds can benefit from the global push towards sustainability.
A variation on the theme
Despite the focus, thematic funds diversify their themes, spreading the risk across multiple companies and industries associated with the theme.
Alignment with personal values
Many thematic funds resonate with investor values, such as ESG (Environmental, Social and Governance) funds for socially conscious investors.
Potential for long-term returns
If the theme performs well, these funds can significantly outperform the broader market indices, making them attractive for long-term investment goals.
Risks associated with thematic funds
Concentration risk
The concentrated nature of thematic funds makes them vulnerable if the theme underperforms or is affected by regulatory or economic changes.
instability
These funds show higher volatility compared to diversified funds due to their dependence on specific trends or sectors.
Liquidity Risk
Some funds may invest in small-cap or mid-cap stocks, which can be illiquid, especially in adverse market conditions.
Performance risk
Thematic funds may underperform if the theme’s expected growth does not materialize as expected, leading to returns below the broader market indices.
Takeaways for Investors
Thematic mutual funds can offer significant benefits, including exposure to emerging trends, diversification within a focused sector and alignment with personal values. However, these funds are not suitable for all investors due to their inherent risks and volatility. Before Investing:
Understand the theme: Make sure the theme aligns with your financial goals and risk tolerance.
Evaluate the risks and rewards: Consider the fund’s past performance, fees and strategy.
Consult the experts: Work with a financial advisor if unsure about the suitability of thematic funds for your portfolio.