Great! You have sucessfully subscribed for newsletters for investments
Thematic Funds are open-ended equity schemes that invest in line with a predetermined investment theme.
Different mutual funds follow different strategies and approaches while building their portfolio. Thematic investment is one such strategy. Thematic investing allows investors to pursue market exposure to specific ideas. For instance, a fund with infrastructure as its theme will invest in companies of sectors like steel, cement, construction, etc.
All mutual funds have an underlying asset which fetches return for them. In the case of large-cap funds, the underlying assets are the stocks of some of India's biggest companies in terms of market capitalization. Similarly, thematic funds have stocks of companies as underlying assets that are united by a predetermined theme.
For instance, if a fund follows an ESG theme, it will invest in companies that have fared well in terms of environmental, social, and (corporate) governance factors from different sectors (from technology to financial services to FMCG to Consumer Durables).
This is what sets thematic funds apart from the conventional approaches of investing, such as investment based on - market capitalization (large-cap, mid-cap, small-cap), style (value & growth), or sectoral (pharma, technology, infrastructure). It invests across different sectors and market caps as long as it ties to the theme. Also, according to SEBI, the minimum investment in equity and equity-related instruments of a particular theme shall be 80% of total assets.
When you invest in a sector fund, no diversification opportunities are provided as your portfolio is restricted within the confines of one sector. Your portfolio will be negatively impacted if, for some reason, the sector is not performing well. On the contrary, in thematic funds, you get some amount of diversification as it invests in line with a theme that may have stocks of companies that belong to various sectors. For instance, let's take a fund that has manufacturing as its theme - It invests in a host of companies that belong to different industries, from construction to chemical to engineering to others. So, even if companies from one sector don't perform well at a given point in time, other sectors will protect your portfolio from failing miserably.
Thematic funds can fetch outstanding returns for the investor if the theme they opt to invest in hits the spot. Having said that, we also need to understand that getting the theme right is not that easy as it sounds. It requires a lot of monitoring of the theme that you are interested in, requires following up on news and headlines regularly. After all your arduous efforts, if you manage to get the theme right - then thematic funds are capable of generating good returns for you.
Thematic funds are one of the riskiest mutual fund categories. That's because when a portfolio is built with a theme in mind, the scope of investment opportunities get restricted. It would have to invest only in those stocks that are related to that theme. So you have a semi diversified portfolio. And if for some reason that theme doesn't play out, the risk of losses is pretty high. So investors who can stomach high risks should invest in these funds.
Sometimes, for a theme to operate at its full potential it takes time. For instance, we always knew that software and internet technology had immense potential since the early 90s. But only now, after 20 years, we can see these themes operating at their full potential. Thus it takes time and patience for these themes to materialize into great investments. So, if you are an investor who is looking for good returns in the long term, thematic funds can be a good option for you. However, it's recommended that first-time investors shouldn't directly jump into thematic funds at the start of their investment journey.
The portfolio of a thematic fund consists of companies' stocks from multiple sectors related to the fund's theme. Not every investor would have an idea about the development of all these sectors. When you have a fair understanding of different sectors in line with the theme of the fund, you can make a better call as to whether the areas can help you get good returns. So, investors who follow the news regularly and have a knack for delving into a variety of sectors can invest in thematic funds. Tracking different areas helps investors gather valuable insights that can help them decide whether to invest in the theme.
It's the post-tax returns that matter. In order to determine that, you should be familiar with how thematic funds are taxed. The capital gains made as a result of selling your thematic fund are taxed depending on how long the investment was held by you.
Let's look at some of the top-performing mutual funds helming the thematic fund category. The performance is based on returns provided by the fund in the last 3 and 5 years.
|Fund Name||3-year Return (%)*||5-year Return (%)*|
|Tata Ethical Direct Plan-Growth||25.08%||14.71%||Invest|
|ICICI Prudential FMCG Direct-Growth||18.18%||13.37%||Invest|
|SBI Magnum COMMA Fund Direct-Growth||27.85%||13.28%||Invest|
|ICICI Prudential Exports and Services Fund Direct-Growth||20.93%||12.44%||Invest|
|Franklin India Opportunities Direct Fund-Growth||22.28%||12.32%||Invest|
*Last updated as on 12th Sep 2022
*It must be noted that these are not fund recommendations. Besides, they are also not the only way through which you can rank funds.
It is quite easy to invest in Thematic Funds on ET Money. All you need to do is just follow these below-mentioned steps:
Thematic Funds are only of one type. They define a theme and then invest in companies that fit that theme. Now these themes can be different, so there are different thematic funds. Currently there are thematic funds with themes like consumption, infrastructure, energy, PSU, etc.
Sectoral Funds invest only in companies of one sector. Thematic funds invest in companies from different sectors that are tied to the theme the fund has. For example, a infrastructure thematic fund will invest in cement, steel, construction, and other sectors involved in infrastructure development of the country.
Thematic Funds are high risk mutual funds. Therefore should not invest more than 5% of your portfolio in these funds
These funds are high risk investments. So if you can take that risk, you can consider them.