Should You Invest in Thematic Funds?

Are you looking to invest according to a well-defined theme? Do you want an investment that offers inflation-beating returns over time? You may consider investing in thematic funds. It is an equity fund investing predominantly in stocks tied to a theme. Moreover, it offers an opportunity to invest in unique business models and companies of the future. Should you invest in thematic funds?

What are thematic funds?

You will find thematic funds investing at least 80% of their assets in equity and equity-related instruments of a particular theme. For example, a thematic fund may focus on healthcare, rural consumption or financial services.

You have a thematic infrastructure fund focusing on industries dealing with steel, cement, paint and construction. Many investors confuse thematic funds with sector funds. However, sector funds invest in companies belonging to one sector, whereas thematic funds invest in sectors tied to a particular theme. 

Should you invest in thematic funds?

You have thematic funds investing in stocks of companies across sectors and market capitalisation based on a theme. It is suitable for market-savvy investors who have a higher risk tolerance and understand theme-based investing. 

You may consider thematic funds if you know when to enter and exit the investment. First-timers in the stock market may avoid investing in thematic funds. 

You must invest in thematic funds only if you have an investment horizon of over five years. Moreover, you must allocate only a tiny portion of your equity portfolio towards thematic funds. 

What are the advantages of investing in thematic funds?

You have thematic funds focusing on trends to identify the businesses of the future. For instance, ESG funds invest in firms that focus on the environment, social responsibility, and corporate governance. Moreover, companies that follow ethical business practices and environment-friendly policies can easily tap funds from investors. 

You will find sophisticated investors investing in thematic funds to diversify their portfolios across sectors and industries optimally. Moreover, sustainable themes such as the ESG theme can outperform most equity funds.  

Investing in thematic funds helps you catch major disruptions early on. For instance, ESG funds help you focus on sustainable investing, which could be a future trend.

How to pick the right thematic fund?

You must focus on sustainable themes to pick the right thematic fund. For instance, many popular themes have failed to take off due to the lack of opportunities in the relevant industries. 

You have many AMCs launching New Fund Offers or NFOs lately around various themes. It helps if you invest in themes that help you attain your investment goals based on your risk profile. 

You must check the track record of the AMC and the fund manager to pick the right thematic fund. Moreover, you must select a thematic fund with a lower expense ratio as compared to peers. It increases your take-home return over some time. 

You must invest in a thematic fund only if you are comfortable with the theme. Moreover, some themes may take time to realise their potential, and you must be patient with your investment. In a nutshell, you must invest in thematic funds if you are an aggressive investor who knows when to enter and exit the investment.

For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in