A subcategory under equity mutual funds, as the name suggests, thematic funds involve investing in stocks for a particular opportunity or theme in various fields and sectors, such as the consumption of energy. For example, if the fund is built on the theme of infrastructure, it might mean investing in equities of cement companies, steel companies, and other related companies.
Thematic funds usually have a concentrated risk factor but play out well over a longer period. They are the perfect combination of mutual and sectoral funds. Under the traditional investment approach, you will need to invest based on market capitalization, that is, in large-cap, small-cap, or mid-cap stocks, or sector-wise, such as energy, pharma, and technology. Thematic funds bring the best of the two, allowing investment in various sectors and caps as long as the theme remains the same.
However, there are a few things to keep in mind when looking to invest in one.
- Your timing needs to be impeccable. Whether it is entry or exit, doing it at the right time can give you a lot of profit since thematic funds are cyclical.
- Invest in a theme you know about and only after doing due research. When it comes to thematic funds, don’t look at past returns but at the future opportunities and their growth potential. Look for sustainable themes, as they usually tend to play out in the long run.
Are Thematic Funds Passive Funds?
The answer to this question is not black or white. Thematic funds are more of a hybrid between the active and the passive ones. As the investor evolves, they should invest in passive thematic funds rather than the active ones for multiple reasons. Globally, the passive category has grown by leaps and bounds, and the change in India is happening now. Though currently, the choices are limited to market cap-based criteria, with just a few depending on additional characteristics like quality and volatility, they increase. Hence, it is crucial for investors to passively start investing in thematic funds for optimal portfolio diversification and the required exposure to high-performing themes.
Global Thematic Funds Market
A means to provide long-term capital appreciation, global thematic investing is based on the principle of identifying the potential and underlying themes and investing in them. In line with the domestic market, the global thematic fund market sees massive potential and surges every day. Global thematic funds bet on the “theme” rather than the company, much like any other thematic fund. When the appropriate theme is chosen, the funds are long-term winners in the global stock market. With an unconstrained approach and the flexibility to invest across regions and market capitalizations, the international thematic funds market is worth USD 595 billion in assets, as of March 2021.
Thematic Funds vs. Sector Funds
While thematic funds focus on and invest in a particular opportunity or theme, sector funds invest only in a particular sector. They are the polar opposite of a diversified mutual fund. Sector funds can invest in pharma, energy, and banking, while thematic funds can invest in several sectors linked by a common theme. For example, a thematic fund may focus on rural consumption and invest in all sectors that help promote this theme. Sector funds are meant for those who are willing to take extremely high risks for high returns. Both require you to have a sound knowledge of the theme or sector you plan to invest in.
How can Thematic Funds Diversify Your Portfolio?
Thematic funds come with many benefits. The most crucial advantage is they allow you to diversify your portfolio far more than sectoral funds. When you invest in sector funds, your investment remains confined only to that particular sector. It means, if the whole sector is not performing well, your portfolio will be negatively impacted.
On the contrary, if you invest in diversified thematic funds, your investment remains spread across sectors in line with one theme, making it less prone to failure. Hence, if one of the sectors is not performing well in diversified thematic funds, the other sectors will mitigate the loss, making it less likely to fail.
Diversified thematic funds can yield very high and outstanding returns if your research is good and you have invested in the right theme at the right time. For this to happen, you need to constantly monitor the theme and keep up with all the headlines and news about it. Before you invest, you have to be thorough with your research and see if the opportunities in that area offer enough growth.
Value of Long-Term Investing
Thematic funds are best for those who are looking for a long-term investment. Long-term investment holds a lot of value. Since themes are usually based on growth potential and opportunities, it takes time for these funds to play out well and give the returns you want or expect. For instance, some years ago, technology had huge potential and opportunities in machine learning (ML) and artificial intelligence (AI). AI is integrated into every sector possible today, and the road for possibilities is still promising.
A thematic fund’s portfolio comprises equities from several industries that are connected to the theme. Not every investor is aware of the development in all these industries. When you have a firm grasp of several sectors related to the fund’s subject, you can make a more informed decision about whether the investment is the right choice. As a result, investors who constantly monitor the news and have a flair for digging into a range of industries might invest in themed funds.
Therefore, long-term thematic funds are the best for seasoned investors who are not looking for immediate returns in contrast to beginners, as they understand the market better than anyone. It is essential to understand the timing and sector. Not only the entry time but also the exit period needs to be planned after careful monitoring.