Should you consider thematic mutual funds?

Kavya Balaji   /   November 25, 2020
Should you consider thematic mutual funds

All mutual funds invest in securities from the stock and debt market that will help them provide returns. Different equity mutual funds invest in several stocks from various sectors. The stocks could be across market capitalisations. For instance, large cap funds invest in some of India’s biggest companies in terms of market capitalisation. Investments can be based on styles such as value and growth. So, mutual funds differ based on investing approaches such as market capitalisation, style and sector.

Coming to thematic funds, these are funds that invest based on a theme. For instance, if a fund follows an agricultural theme, it will invest in companies that are related to agriculture such as farming, tractors, fertilisers, etc. This is why thematic mutual funds are different from funds that follow conventional investing.

Thematic funds invest across different industries and market capitalisations as long as they are related to the theme. As per guidelines given by the Securities Exchange Board of India (SEBI), the minimum investment in equity securities of a particular theme can be 80% of the total assets. So, a thematic fund is more focused than a diversified equity fund.

How are thematic funds different from sectoral funds?

A sectoral fund will only focus on just one particular industry or sector. These funds invest only in businesses that operate in that specific sector or industry. For instance, a sectoral fund may invest in sectors such as finance, Information Technology, Pharma, Banking, etc.

Thematic funds focus on a theme and can encompass different sectors. Themes could be rural consumption, defence, etc. So, thematic funds could invest in more sectors. For instance, infrastructure may be the theme of a mutual fund and it will invest in all sectors that can get gains from the theme. When infrastructure spending goes up, then it will help all the related sectors to do well as their revenues will increase. This will include sectors such as cement, steel, and power. So, a thematic fund with infrastructure as the theme can invest in all these stocks that look to benefit from this theme.

When you invest in a sectoral fund, there is no diversification as the focus is on one sector. If the sector doesn’t do well, the fund won’t give you good returns. However, in thematic funds, there will be some amount of diversification as the investments will be across sectors. Even if companies from one sector don’t perform well, other sectors will protect the fall in the fund’s returns.

Should you invest in thematic funds?

If you have a high-risk appetite, want more returns and are looking to diversify your mutual fund portfolio, you could invest in thematic funds. You need to be clear about the theme and understand how it will help stocks do well in the long run. There are many thematic funds that have given decent returns in the past year. For instance, Aditya Birla Sun Life Digital India Fund has given over 43% in one year while the annualised returns of the fund for the past three years are 24%. If you look at SBI COMMA Fund, the one-year returns are 17.3% while the five-year annualised return is 14.9%.

What to look for in thematic funds?

You need to see if the investment theme offers enough quality stocks for the fund to invest in. Another point is that the theme cannot be ambiguous or too vast such that the fund can invest in any stock. Take the HDFC Housing Opportunities Fund. This fund invests in all sector related to housing. This includes banks, housing finance companies, real estate, cement companies etc. The theme of the fund is not very precise or specific. While the fund has done well in the short term, the long-term returns are negative.

You need to make sure that the theme is sustainable. For instance, defence could seem a great theme. However, defence stocks haven’t done really well. So, choose themes that are viable and will remain meaningful in the long run.

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