Let us imagine a farmer who plants a special crop that thrives only under specific conditions, he knows that the soil, water, and weather all align for this unique opportunity. This is much like a thematic fund—a mutual fund designed to invest in a particular theme, trend, or sector that is expected to grow based on current market opportunities. Whether it’s technological innovation, clean energy, healthcare advancements, or emerging consumer trends, thematic funds focus on sectors that are set to thrive in the future. For example, a technology-themed fund might invest in companies driving AI and automation, while a renewable energy fund could back businesses leading the green revolution.
In essence, thematic funds allow investors to capitalise on specific ideas and trends, but just like the farmer, they must monitor risks, as success depends on how well the chosen theme flourishes in the market.
The top 10 thematic funds with 1-year return are listed below:
| S. No. | Name of the Fund | 1 Yr Return (%) | TER (%) | Fund House |
|---|---|---|---|---|
| 1 | LIC MF Infrastructure Growth Direct Plan | 59.49 | 1.1 | LIC Mutual Fund |
| 2 | HDFC Defence Growth Direct Plan | 56.84 | 0.75 | HDFC Mutual Fund |
| 3 | HDFC Pharma & Healthcare Growth Direct Plan | 52.41 | 0.94 | HDFC Mutual Fund |
| 4 | Bandhan Infrastructure Growth Direct Plan | 51.34 | 0.82 | Bandhan Mutual Fund |
| 5 | IDBI Healthcare Growth Direct Plan | 48.97 | 1.21 | IDBI Mutual Fund |
| 6 | LIC Healthcare Growth Direct Plan | 48.97 | 1.21 | LIC Mutual Fund |
| 7 | SBI Healthcare Opportunities Growth Direct Plan | 48.78 | 26.01 | SBI Mutual Fund |
| 8 | Tata Digital India Growth Direct Plan | 48.2 | 0.4 | Tata Mutual Fund |
| 9 | HDFC Technology Growth Direct Plan | 48.2 | 0.97 | HDFC Mutual Fund |
| 10 | ICICI Prudential Pharma Healthcare & Diagnostics Growth Direct Plan | 47.98 | 1.09 | ICICI Prudential Mutual Fund |
Source: Kuvera, 15th December, 2024.
The above data provided represents the top 10 Fund of Funds (FoFs) with the highest one-year returns, showcasing a variety of sectors and industries.
Leading the list is LIC MF Infrastructure Growth Direct Plan with an impressive return of 59.49%, followed by HDFC Defence Growth Direct Plan at 56.84%.
Funds focusing on healthcare, such as HDFC Pharma & Healthcare Growth Direct Plan and IDBI Healthcare Growth Direct Plan, also perform well, with returns exceeding 48%. SBI Healthcare Opportunities Growth Direct Plan offers a noteworthy return of 48.78%, despite its high Total Expense Ratio (TER) of 26.01%, indicating the diversity of strategies within FoFs.
The performance of these funds demonstrates the increasing interest in sector-focused investments, particularly in infrastructure, defense, healthcare, and technology, aligning with investor interest in specific, high-growth sectors.
Thematic funds have gained significant traction in India, especially in the past few years, driven by strong market performance in sectors like infrastructure, healthcare, and technology. As reported by The Economic Times, assets under management (AUM) for sectoral and thematic funds surged manifold from Rs 2.71 lakh crore in January 2024 to Rs 4.61 lakh crore in November 2024, reflecting growing investor confidence in this category.
These funds target specific themes or sectors, such as PSU companies, infrastructure, and technology, offering high returns when those sectors outperform. The allure of thematic funds lies in their potential for above-market returns during favorable economic conditions, such as government-driven initiatives or booming sectors like infrastructure and healthcare.
However, experts caution that thematic funds come with higher risk, especially when sectors are already performing well. They advise investors to be selective and ensure they understand the specific risks involved, as market rotations can impact sectoral performance.
The Benefits of Thematic Funds in India
Targeted exposure, capitalizing on trends, sectoral diversification, potential for above-market returns and access to niche markets are some of the key benefits offered by the thematic funds in India, they:
- provide focused investments (targeted exposure) in specific sectors or themes, such as technology, healthcare, or infrastructure, offering potential for higher returns than broader market funds;
- allow investors to capitalize on emerging trends and growth opportunities driven by factors like government policies or global shifts in industries such as renewable energy or digitalization;
- offer sectoral diversification by investing in a range of companies within a chosen theme, reducing the risk associated with individual stocks;
- can outperform traditional funds during favorable economic conditions by investing in high-growth sectors; and
- provide access to emerging sectors that may be challenging to invest in directly, enabling investors to tap into specialized growth areas.
As described above, thematic funds in India offer several advantages, the provided data also reflects on similar lines. For instance, Funds such as LIC MF Infrastructure Growth Direct Plan and HDFC Defence Growth Direct Plan, show robust returns, with the former delivering a 59.49% return in the past year. They allow investors to focus on specific sectors expected to perform well due to macroeconomic trends, like infrastructure development or defense spending.
Furthermore, the thematic funds also provide access to high-growth sectors like healthcare, as seen in HDFC Pharma & Healthcare Growth Direct Plan (52.41% return) and Bandhan Infrastructure Growth Direct Plan (51.34% return).
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Thematic funds offer Indian investors diversification in emerging trends like digitalization, healthcare, and technological innovation, but carry higher risks due to their concentrated exposure.Therefore, the investors must take care of the following risks/factors while choosing the thematic funds:
Things To Note Before Investing In Thematic Funds
1. Concentration Risk
Understanding the risk of becoming high concentration on a single theme is crucial because a decline in the theme or sector could result in large losses and vice-versa. For example, industries like technology or healthcare may do well under specific market situations, but they may also be impacted by market cycles or changes in regulations.
2. Market Timing
As timing the market is challenging, investors should be cautious about entering a thematic fund when the sector is already at its peak.
3. Commitment
Some themes may take longer to materialize or realize their growth potential. For example, infrastructure or renewable energy sectors may require a longer investment horizon to see substantial gains, hence, such investments seek long-term commitments.
4. Volatility
Thematic funds tend to be more volatile compared to broader index funds or diversified equity funds. While they have the potential for higher returns, they also expose investors to greater short-term fluctuations, especially if the theme faces unforeseen challenges.
5. Diversification
Since thematic funds are concentrated in specific sectors, they provide limited diversification. Investors should ensure that their overall portfolio is diversified to mitigate the risks associated with sectoral concentration.
6. Tracking Error and Expenses
The expense ratios (TER) of thematic funds may be greater than those of index funds or broader market funds. It’s critical to assess if the possible benefits outweigh the expenses. For instance, funds like SBI Healthcare Opportunities Growth Direct Plan and HDFC Pharma & Healthcare Growth Direct Plan have relatively higher TERs, which can impact long-term returns.
Wrapping Up
To sum up, thematic funds are mutual funds India category that can provide a focused method of investing in industries with rapid growth, but because of their narrow concentration, they carry greater risk. Although these funds have the potential to yield substantial returns, especially in industries like technology or healthcare, they necessitate a thorough investment plan and a long-term outlook.
As Warren Buffet wisely said,
“The stock market is a device for transferring money from the impatient to the patient,” highlighting the importance of patience and thoughtful strategy when investing in specialized funds like these.
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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.
