Thematic Mutual Funds

Investing in stocks continues to gain popularity, as indicated by the rise of investors and the number of those who invest. From individual equities to exchange-traded funds and mutual funds, there is an abundance of products you may use to diversify your portfolio and reduce risk. Mutual funds are especially popular since they allow you to invest in a varied array of securities and utilise the services of a professional money manager who manages the investments of the fund. A sort of mutual fund is a thematic fund, sometimes known as a thematic mutual fund. Let’s examine in this article thematic funds in India, what thematic investing is, and how to invest in thematic mutual funds.




What are Thematic Mutual Funds?


Thematic funds are mutual funds that invest in the securities of companies with a shared theme. The objective of the fund managers of thematic funds is to concentrate their portfolio on a particular economic component. The theme may be anything from international company stocks to commodity stocks and may span many industries or sectors. Thematic mutual funds are open-ended mutual funds that invest a minimum of 80% of their assets in a specific theme. These funds are equity funds since 80% of their assets are invested in equities and equity-related products of a specific sector or theme. A thematic fund focuses on a certain opportunity or theme. For instance, an ethical fund focuses on Shariah-compliant stock investments. A thematic fund may contain equities from different industries and may be more diversified than sectoral funds.


However, sectoral and thematic mutual funds exhibit greater seasonal and cyclical characteristics. The funds provide the highest returns during the sector’s growth phase. Any decline in the sector can have a negative impact on the fund. When investing in sectoral and theme mutual funds, investors should exercise prudence, and the timing of their withdrawal from these funds is also crucial.


Practically speaking, a thematic mutual fund performs identically to any other mutual fund. Depending on the amount you put in the fund, you receive a proportional share of the pie. The fund is managed by a fund manager who makes investment decisions, and there is a vast selection of investment funds with diverse investment aims, objectives, and techniques. A thematic mutual fund also accomplishes all of these objectives. The distinctive characteristic of a themed mutual fund is its investment strategy.


As suggested by its moniker, a thematic mutual fund bases its investing selections on the underlying theme. For example, a themed fund could be based on the concept of FMCG and would invest in FMCG-sector companies. These themes are unrestricted and determined by the fund and fund management in order to attract like-minded investors to their thematic fund. A company could, for instance, offer a minimum variance theme fund, a transportation and logistics-focused thematic mutual fund, or a special situations fund. Currently, there are also funds that offer an ethical thematic mutual fund that bases its investing selections on a set of ethical standards while retaining the fund’s profitability. Remember that thematic funds can also focus on fixed income products, such as bonds, in addition to equities and stocks.


Example: An infrastructure theme fund invests in a variety of industries, including cement, power, steel, real estate, etc. A manufacturing theme fund invests in the shares of companies engaged in manufacturing in several industries, such as chemicals, pharmaceuticals, automobiles, etc.


How do Thematic Mutual Funds Work?


The underlying asset class of mutual funds can generate returns. Take, for instance, large-cap funds, whose underlying assets consist of the stocks of large, established companies based on their market capitalisation. In a similar manner, thematic funds invest in stocks of companies selected according to a predetermined theme; these equities serve as the mutual fund’s underlying assets.


Let’s better comprehend this with an illustration. Consider a fund that follows an ESG theme. It will invest in companies that are sector leaders in terms of environmental, social, and (corporate) governance performance (like technology, financial services, FMCG, etc.).


This distinguishes thematic funds from traditional investment strategies such as market capitalisation (large-cap, mid-cap, small-cap), style (value & growth), or sectoral allocation (pharma, technology, infrastructure). It invests across sectors and market capitalisations as long as it is relevant to the theme. In addition, SEBI stipulates that a minimum of 80% of total assets must be invested in equities and equity-related instruments of a certain theme.


What are the Benefits of Investing in Thematic Funds?


  • Provides better diversification: When you invest in a sector fund, there are no diversification opportunities because your portfolio is limited to a single area. If for any reason, the sector is performing poorly, your portfolio will be badly affected. In contrast, thematic funds provide some diversity because they invest in accordance with a subject that may include stocks of companies from numerous industries. For example, a fund that focuses on manufacturing invests in a variety of companies from diverse industries, including construction, chemical, and engineering, among others. Therefore, even if companies in one area perform poorly at a given time, other sectors will prevent your portfolio from failing severly.


  • Market-beating returns if you choose the correct theme: If the theme in which an investor chooses to invest in a thematic fund is appropriate, he or she can earn exceptional profits. Having said that, we must also recognise that getting the theme correct is not as simple as it sounds. It needs extensive research of the topic you are interested in, as well as regular monitoring of news and headlines. If, despite your laborious efforts, you succeed in identifying the proper theme, then thematic funds typically are capable of providing you with lucrative rewards.


Who Should Invest in Thematic Funds?


  • Investors with a high tolerance for risk: Thematic funds are one of the riskiest types of mutual funds. When a portfolio is constructed with a particular topic in mind, the breadth of investment choices is narrowed. It would have to invest solely in stocks associated with that theme. So you have a portfolio that is just partially diversified. And if, for some reason, this theme fails to materialise, the potential for losses is rather large. Therefore, only investors with a high-risk tolerance should invest in these funds.


  • Long-term returns: Sometimes, it takes time for a theme to reach its full potential. For example, we have known since the early 1990s that software and internet technology have enormous promise. But only now, twenty years later, can we observe these themes at their full potential. Therefore, it takes time and perseverance for these subjects to develop into lucrative ventures. Therefore, if you are an investor seeking long-term profits, thematic funds may be a smart option for you. However, it is advised that first-time investors not immediately invest in thematic funds at the outset of their financial careers.


  • Smart and experienced investors: The portfolio of a thematic fund is comprised of stocks of firms from several industries that are relevant to the fund’s theme. Not every investor would be aware of the growth of any of these areas. When you have a thorough understanding of the many sectors that align with the fund’s theme, you can make a more informed decision as to whether the sectors can help you generate high returns. Therefore, individuals who constantly monitor the news and have a talent for diving into various industries might invest in thematic funds. Investors can gain useful information that can assist them in deciding whether to invest in a subject by monitoring various sectors.


Things to Consider Before Investing in Thematic Funds


  • Investment Objectives

Before investing in these funds, one must determine their investment objectives. If you want to maximise your investment in themed funds, you should have a longer investment horizon than five years. The explanation is straightforward. For any industry to reach its height, a considerable amount of time is required. When investing in these funds, you should have long-term objectives such as early retirement, supporting a child’s school, etc.


  • Investment Risks

Despite the fact that the benefits of investing in thematic funds may appear alluring, it is vital to be aware of the associated risk. This is a high-risk path. Therefore, first-time investors are discouraged from investing in thematic funds. Let’s examine the principal risks connected with these funds.


  • Semi-Variable Portfolio

A thematic fund’s portfolio is marginally more varied than the portfolios of sectoral funds, which offer no diversification. However, it provides fewer possibilities for diversification than other equity funds, such as multi-cap funds whose portfolios include equities from several industries. As these equity funds are not attached to a particular theme, the likelihood of all equities falling at once is lower compared to thematic funds.


  • Some Themes Might Take Longer to Develop

Even while some of us may recognise a theme’s promise in the near future – say, within the next four to five years – there is a substantial probability that our predictions will be incorrect. It may take more time than we anticipated. For example, 2007 was a wonderful year for infrastructure. Numerous new thematic funds were introduced, and many investors wished to capitalise on them. Even after more than a decade, the infrastructure topic has not seen significant development. A solid return on an investment in a thematic fund might not be realised for up to 20 years. Therefore, there is a temporal risk with thematic funds.


  • Expense Ratio.

You must be crystal clear on the expenses that eat into your profits. The Asset Management Companies (AMC) will charge you a fee known as an expense ratio in order to manage the thematic funds you intend to invest in. This fee covers the fund’s administrative and operating costs, such as the fund manager’s pay, marketing expenses, etc. The fee is assessed on an annual basis.


  • Theme Evaluation

Before investing in funds, it is necessary to conduct a comprehensive examination of the subject or theme. Periodically, read about the industry or topic and monitor analyst reports. These provide valuable insight. Additionally, monitor the companies to determine if they are genuinely generating positive returns.


  • Investment exposure

Consider investing in the sector or thematic funds only when your portfolio is well-diversified. In addition, an individual’s exposure to these funds typically should not exceed 5–10% of their investment portfolio.


  • Stop loss limit

As thematic mutual funds are highly volatile assets, a stop loss should be strictly adhered to when investing in them. This will contribute to the reduction of losses. In other words, establishing a stop loss target will assist with exiting the transaction at the optimal time. If a sector does poorly, investors may consider selling their stakes. A stop loss between 15% and 20% is a prudent limit, and one should exit the fund without hesitation.


  • Performance and returns of the fund

Frequently, industry trends are cyclical. Therefore, it is prudent to analyse both the current trend and the past success of a sector. A sector’s phase can be indicative of its future success. Since sector and thematic funds are more specialised, it is crucial to understand their tendencies. Even if historical returns do not guarantee future returns, it is beneficial to analyse them in order to comprehend the fund’s performance over market cycles. Also, consider future opportunities for a specific industry or theme.


  • Financial Ratios

Multiple financial ratios aid in the evaluation of thematic mutual funds. However, the following are some of the most important financial ratios for evaluating these funds:


    • Alpha: It evaluates the performance of a fund relative to its benchmark. If the alpha is positive, it indicates that the fund is outperforming its benchmark. Compare the alpha of two or more funds investing in the same sector or theme and you can select the fund with the highest alpha.
    • Normal Deviation: Standard deviation measures the portfolio’s volatility. In other words, it assesses the riskiness of the fund by comparing the returns to the average returns. A large standard deviation indicates that a fund’s returns are very erratic and, thus, dangerous or risky.
    • Beta: It is a measure of the sectoral and theme fund’s susceptibility to stock market fluctuations. If the beta is more than one, a fund’s sensitivity to market fluctuations is high. If a fund’s beta is smaller than one, it is less volatile. However, if the beta equals one, the fund and the market are in sync.
    • Portfolio Turnover Ratio: The portfolio turnover ratio indicates the number of times a fund’s portfolio has changed over the course of a year. A reduced turnover ratio is seen favourably. It demonstrates that the fund manager has not significantly rebalanced the portfolio, hence keeping transaction costs and other expenditures low.
    • Sharpe Index: The Sharpe ratio quantifies the risk-adjusted returns of a sectoral or theme-based fund. In other words, it indicates whether the returns are the result of a superior portfolio or the risk assumed. Consequently, a greater Sharpe ratio is preferable.
    • R-squared: It assesses the impact of market fluctuations on a fund’s performance. It goes from 0 to 100, where 0 indicates no correlation with the market and 100 indicates a high correlation.


Taxation on Thematic Funds


Similar to equity mutual funds, thematic mutual funds are subject to short-term and long-term capital gains tax.


  • Short Term Capital Gain Tax (STCG): If you sell your investments within a year, the gains are considered Short-Term Capital Gain (STCG), and you are required to pay a 15% tax on them.


  • Long Term Capital Gain Tax (LTCG): Gains of up to 1 lakh each fiscal year are exempt from taxation. LTCG Gains over 1 lakh are taxed at a rate of 10%.


Top Performing Thematic Mutual Funds (as per 5-Year return)


Scheme 5-Year Return AUM(Cr)
SBI Technology Opportunities Fund 24.56% 2,450.21
Quant Infrastructure Fund 23.85% 763.23
Nippon India Consumption Fund 17.45% 253.20
Canara Robeco Consumer Trends Fund 17.20% 940.88
SBI Consumption Opportunities Fund 16.85% 1,119.95

Source: AMFI (data as on 23/09/2022)


How to Invest in Thematic Funds?


You can invest in direct mutual funds through Kuvera and avoid paying commissions. It is the best platform to invest in mutual funds as it is 100% free and helps you find the right investment for your life goals.


To invest in mutual funds via Kuvera, follow the given steps:


Step 1: Sign up at


Step 2: Complete the KYC requirements and link your bank account.


Step 3: Click on MF in the Explore section to choose mutual funds for investment.




  • What is the difference between Sectoral and Thematic funds?

Sectoral Funds exclusively invest in companies within a particular sector. Thematic funds invest in companies from various industries that are related to the fund’s theme. For instance, a thematic infrastructure fund will invest in cement, steel, construction, and other sectors engaged in the nation’s infrastructure development.


  • Where do thematic funds invest?

Thematic Funds must invest eighty per cent of their assets in stocks related to a specific theme. A Thematic Infrastructure Fund, for instance, will invest in stocks relating to the infrastructure subject. This implies they invest in companies related to the growth of our nation’s infrastructure, such as those in the steel, cement, and construction industries.

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