Investors can pursue market exposure to specific concepts through thematic investing. For example, a fund focused on infrastructure will invest in companies in industries such as steel, cement, and construction.
Every mutual fund has an underlying asset that generates income. The underlying assets of large-cap funds are the equities of some of India's largest corporations in terms of market capitalisation. Thematic funds, on the other hand, include equities of firms as underlying assets that are linked by a common subject. If a fund has an ESG focus, for example, it will invest in companies that have performed well in terms of environmental, social, and governance considerations across many industries.
This is what distinguishes thematic funds from traditional investment strategies such as market capitalization, value & growth, or sectoral investing. It invests in a variety of sectors and market capitalization as long as they are related to the subject. SEBI also mandates an investment of at least 80% of total assets in equities and equity-related products of a certain subject.
- Offers More Diversification Than Sectoral Funds: When you invest in a sector fund, you don't get any diversification because your portfolio is limited to only one area. If the sector is underperforming for some reason, it will have a negative influence on your portfolio. Thematic funds, on the other hand, provide some diversity because they invest in accordance with a topic and may include stocks from companies in several industries.
- If You Get the Theme Right, You Can Outperform the Market: If the investor chooses the right theme to invest in, thematic funds can provide excellent returns. Having said that, we must recognise that nailing the theme is not as simple as it appears. It necessitates extensive surveillance of the topic of interest, as well as constant monitoring of news and headlines. If you succeed in getting the theme correct after all of your hard work, thematic funds can provide you with good returns.
- Investment Objectives: Before investing in these funds, one should have a thorough understanding of their investment objectives. You should have a longer investment horizon than 5 years if you want to get the most out of your thematic fund investment. The reason is straightforward. It takes a long time for every industry to realize its maximum potential. As a result, when investing in these funds, you should have long-term goals in mind, such as early retirement, paying for a child's education, and so on.
- Risks of Investing: Although the benefits of investing in thematic funds may appear appealing, it is equally important to understand the risks involved. It's a high-risk route to take. As a result, it is advised that first-time investors avoid investing in thematic funds.
- Semi-Diversified Portfolio: A thematic fund's portfolio is slightly more diversified than a sectoral fund's portfolio, which has no diversification. However, it has fewer diversification possibilities than other equity funds, such as multi-cap funds, which invest in equities from a variety of industries. Because these equity funds are not attached to a topic, the risk of all equities falling at the same time is lower than with thematic funds.
Related Blogs: How to Analyse Mutual Funds for Big Returns | Things to Know Before Investing in Mutual Funds | Mutual Fund - Need of Financial Plan | How to Open a Demat Account Without a Broker | Factors to Keep in Mind While Opening a Demat account