As the term ‘thematic’ implies, thematic funds make investments based on a specific subject; they select sectors and industries associated with a particular idea or theme. The investment of money in enterprises that revolve around a specific theme rising as a result of economic trends might be fruitful when there is an increasing current for that specific theme. Thematic fund managers try to take advantage of such windows of opportunity whenever they can. It is an equity fund best suited for investors who are willing to take risks.
Understanding the Investment Strategy of Thematic Funds
Fund companies frequently issue thematic fund schemes when they believe there is a potential to invest in and expand a business around a clearly defined subject. The following characteristics of thematic funds should be kept in mind by investors to better comprehend their investment strategy:
Thematic funds are a form of mutual fund that invests in specific topics. According to the SEBI (Securities and Exchange Board of India) mandate, stocks and equity-related products must account for at least 80 per cent of total asset allocation.
They make investments in various industries and a diverse range of businesses that are oriented around a single idea or topic. As a result of socio-political and macro-economic variables, this theme/idea has the potential to grow significantly in the future. For example, a thematic fund investing around the theme of rural development may make investments in sectors such as chemicals, fertilisers, autos, core agri-products, and other related industries and other types of funds. These companies can come from various industries and have a range of capitalisation amounts, but they can all contribute to the advancement of a single idea.
This is in contrast to traditional investing procedures, in which investment categorisations are made based on the size of the company’s capitalisation or the industry in which the company operates. On the other hand, thematic funds provide highly targeted exposure to equities and sectors aligned with the theme they are attempting to achieve.
Because it is unorthodox, it can take advantage of a favourable economic scenario by selecting a topic that is now popular and investing in it. It is possible for financial specialists to select the optimal investment strategy, which can result in rewards that outperform benchmarks and yield higher returns than other equity funds.
They are considered a high-risk fund because of their excellent return potential. Because they are equity funds that specialise in a particular theme, they have the potential to provide spectacular returns if the market is in their favour. During market downturns, on the other hand, the returns can readily be eroded, resulting in significant losses for the investor.
What is the difference between Thematic Funds, Sectoral Funds, and Focused Funds?
When it comes to thematic funds, they are frequently confused with sectoral funds or focused funds, even though they are all fundamentally different. Focused funds invest in a restricted number of stocks from any market capitalisation or industry, and a common theme does not always link them. These stocks are favourites of fund managers for various reasons, including their strong performance in the stock market and their enormous future development potential. Sector oriented funds, which are often confused with theme funds, are funds that invest in a particular industry and are restricted to that industry. Thematic funds can make investments in various industries that are aligned with the theme in which they are investing.
For example, sectoral funds may invest in specific industries such as pharmaceuticals, banking, real estate, energy, and so on, whereas theme funds operate differently. If, for example, interest rates on house loans are lowering and experts anticipate an increase in demand for affordable housing, they can establish a fund to support this cause. The fund can invest in construction, cement, banking, financial services, paint, and other related industries. Although banking and building are two distinct industries, they are brought together in this context by a familiar concept.
Points to Consider Before Making a Financial Investment
If you are considering investing in thematic funds, you should consider the following factors before deciding.
Market volatility is the key ingredient of these funds, making them a good fit for more aggressive investors. It is recommended for investors who are well-versed in market cycles and know whether or not exposure to specific concepts will provide the best possible returns.
It is past time for the market to make investments in thematic funds. Investors may fall for thematic funds because they hear about them and believe they are a good investment. As of this point, the profit-making cycle has already begun to retrace its steps.
A medium to long-term investment of 5-7 years at the very least, preferably up to 10 years, is recommended.
If you are an opportunistic investor to create wealth over numerous cycles of market and economic movements, you may consider investing. If you have extensive knowledge of the market and the different macroeconomic aspects that drive it, you may consider investing in some of these funds.
However, while foreign funds can give worldwide exposure, the impact of external factors such as currency fluctuations can also impact the returns of these funds.
Thematic funds invest in stocks of firms associated with a specific subject that has been selected. These underlying assets can generate significant profits if the investors select the appropriate theme at the appropriate time; otherwise, they represent a high-risk investment. It is not only suited for high-risk tolerant investors, but it is also suitable for seasoned investors who can prudently exploit the sectors that are weaved around a common subject. Active investors with a long track record who are prudent enough to predict which industries will perform well and which themes are likely to emerge can make investments. It is also critical to regularly monitor the market to determine the best times to enter and exit to maximise the profits from a limited beneficial lifespan before incurring losses.