If you’ve already Googled “what are thematic funds” or “top thematic funds India,” you’ve come to the right place. Thematic funds are open-ended equity schemes that invest based on a predefined investment theme. These funds focus on specific trends or sectors, aiming to capitalise on emerging opportunities within those thematic areas. Unlike traditional diversified funds that aim to track a broad market index (like the Nifty 50 or S&P 500), thematic funds focus on a particular sector, trend, or idea. Different mutual funds adopt diverse strategies and methodologies when constructing their portfolios.
Thematic investment, or a thematic mutual fund, represents a strategy that enables investors to gain exposure to specific market themes or ideas. These funds invest across various sectors and companies with different market capitalisations, as long as their investments align with the chosen thematic focus. According to SEBI regulations, thematic funds must allocate a minimum of 80% of their total assets in equity and equity-related instruments related to the specific theme they are designed to track. This ensures that the majority of the fund’s holdings are directly tied to advancing the thematic objective, aiming to deliver returns based on the performance of companies and sectors associated with that theme.
Thematic Mutual Funds Example
Think of investing in green or renewable energy initiatives or sustainability through mutual funds.
A great example of a thematic investment is a mutual fund or ETF that focuses on renewable energy. This type of investment targets companies involved in renewable energy sources like solar, wind, and hydroelectric power, along with related technologies. Such a fund might include companies that manufacture solar panels, develop wind farms, provide energy storage solutions, or engage in renewable energy research and development.
Investment in thematic funds like these allows investors to tap into the growth potential of the renewable energy sector, which is driven by global trends towards sustainable energy sources and environmental considerations.
Characteristics of Thematic Funds in India
1. Flexibility
Fund managers of thematic funds enjoy a considerable flexibility in constructing their portfolios. This flexibility stems from their ability to select stocks that closely align with the chosen thematic focus. Unlike traditional funds that are bound by market capitalisation or sector-specific constraints, thematic mutual funds prioritise companies directly involved in or poised to benefit from the identified theme or trend. Moreover, they aren’t limited to a specific geographical region. Thematic fund managers can select stocks from different regions globally, provided these companies play a significant role in advancing the thematic trend. For example, in a thematic fund centred on cybersecurity, investments might include companies from the US, Europe and Asia that specialise in cybersecurity solutions and services. The fund’s holdings can be adjusted based on changing market dynamics and advancements within the thematic area, allowing fund managers to mitigate risks associated with specific companies or sectors.
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2. Long-Term Horizon
Thematic funds can be volatile in the short term due to factors like market sentiment, regulations, technology changes, and economic conditions affecting companies within the theme. Growth in thematic funds often takes time, as companies in emerging sectors or disruptive technologies encounter challenges in scaling, market share and profitability. Patient investors can benefit from long-term growth compounding but should be prepared for short-term fluctuations. Maintaining a longer investment horizon is crucial to fully capture the growth potential of thematic themes focusing on innovative sectors or trends. Thus, if an investor is looking for good returns in the long term, thematic funds can be a good option.
Check out top sectoral-thematic funds here.
Advantages of Thematic Investments
1. Diversification
Thematic funds can offer more diversification compared to sectoral funds. While sector funds limit investments to a single sector, leaving the portfolio vulnerable if that sector underperforms, thematic funds offer some level of diversification by investing according to a specific theme, which can encompass companies from various sectors and with different market capitalisation. For example, a manufacturing-themed fund might invest in companies across industries like construction, chemicals, engineering and others in companies with small, mid and large caps. This diversification helps mitigate the risk of poor performance in any one sector at a given time, safeguarding an investor’s portfolio.
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2. Potential for Higher Returns
Thematic funds also have the potential to deliver impressive returns if the right theme is chosen. By targeting specific themes, thematic funds seek to identify companies poised to benefit the most from these trends. These companies may be at the forefront of innovation within their respective sectors, enjoying faster revenue growth, expanding market share or benefiting from favourable regulatory environments. If the thematic theme performs well, the returns can potentially be substantial, as the fund’s concentrated exposure to high-growth sectors or trends can lead to outsized gains compared to broader market indices.
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Considerations Before Making Thematic Mutual Fund Investments
1. Thematic Relevance and Longevity
You need to assess the relevance and potential longevity of the thematic focus. Determine whether the theme aligns with long-term structural trends, technological advancements, demographic shifts, or regulatory changes. Themes with sustainable growth prospects are more likely to offer enduring investment opportunities.
2. Risk Assessment
Thematic investments carry a higher risk than other funds due to their focused exposure to specific sectors or trends. Evaluate the risks associated with the theme, including regulatory risks, technological obsolescence, market competition and macroeconomic factors.
3. Portfolio Composition and Diversification
Review the composition of the thematic fund’s portfolio to ensure it provides adequate diversification within the theme. This should include companies across different sectors and regions with varied market capitalisations. Diversification helps mitigate risks associated with individual stocks or sectors.
4. Investment Horizon
Thematic investments often require a longer investment horizon to fully capture the growth potential of the chosen theme. Assess your investment goals and timeline to determine whether you have the patience and capacity to hold the investment over the necessary time frame.
5. Costs and Returns
Consider the costs associated with thematic funds, including management fees, expense ratios and transaction costs. The expense ratio, which covers the fund’s administrative and operating expenses like the fund manager’s salary and marketing costs, is charged annually and is usually higher compared to sectoral funds. Compare these costs with potential returns to ensure they are justified by the fund’s performance and investment objectives.
Suitable Investors for Thematic Funds
- Investors with a long-term investment horizon and long-term goals like early retirement etc.
- Investor willing to take high risk
- Investors who are well-informed and do not hesitate to delve into a variety of trends or sectors
Returns and Fundamentals of Top Five Thematic Mutual Funds in India
Below is a table showing the top-performing thematic indices based on returns provided by the index in the last 5 years:
| Particulars | Nifty India Defence (%) | Nifty SME EMERGE (%) | Nifty EV New Age Automotive Index (%) | Nifty Transportation & Logistics (%) | Nifty 500 Multicap India Manufacturing Index (%) |
|---|---|---|---|---|---|
| QTD Return | 57.16 | 29.48 | 21.4 | 16.78 | 18.68 |
| YTD Return | 75.11 | 32.54 | 33.09 | 35.42 | 28.72 |
| 1 Year Return | 169.52 | 89.13 | 62.57 | 69.42 | 56.92 |
| 5 Year Return | 58.42 | 58.12 | 34.51 | 28.89 | 27.9 |
| Since inception Return | 39.43 | 42.49 | 22.12 | 19.51 | 16.53 |
| P/E ratio | 64.36 | 95.38 | 35.16 | 30.18 | 33 |
| P/B ratio | 17.39 | 9.21 | 6.54 | 6.76 | 4.42 |
| Dividend yield | 0.38 | 0.09 | 0.83 | 0.76 | 0.75 |
Source- NSE website as of July 12, 2024.
Wrapping Up
Thematic funds can help you give a big push to your portfolio with higher potential returns. However, it’s important to remember that these potential returns come with a considerably higher degree of risk. To choose the right theme to invest in, you can look at Thematic Funds in India.
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DISCLAIMER: Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors. Investments in securities market are subject to market risks. Read all the related documents carefully before investing. The securities quoted are for illustration only and are not recommendatory.
