The Buyt Desk
Thematic funds are tricky and you have to invest in the right theme and at the right time to get good returns. The bet here is a high risk, high return.
Thematic funds demands predicted long-term trends of an entire industry approach and not just specific sectors or companies. This is a broad theme-based which may cover many sectors like Infrastructure theme covers mining, capital goods, energy, construction and communication stocks. Unlike large-cap and mid-cap funds, these are less diversified and this has its own pros and cons. If it works as per your plans the returns will be extraordinary. There is also a possibility that some sectors might work well in your theme and some may not and even time of investment matters. Selecting the right theme is a difficult task and it is a high-risk bet.
What are Thematic Funds?
The word ‘thematic’ itself explains that thematic funds are investments in one particular theme. You should choose industries and sectors that fit into an idea of a theme. Here the idea of investing in equity funds of a specific theme is that when that theme is growing and rising out of economic trends, then the businesses revolving around this theme can give good returns. Investors here keep looking out for opportunities and when they have a window where some theme is doing well, they invest and get good returns. This is suitable only for aggressive investors who are ready to take big risks for big returns.
What is the investment approach for Thematic Funds?
Fund houses initiate thematic fund schemes once an opportunity window opens where investment into well-defined themes can generate good returns. Below are a few attributes that you should understand to make a good strategic approach –
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Thematic funds are a type of equity fund as SEBI mandates a minimum of 80% of thematic funds should be invested in equity securities.
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The investment happens in an array of sectors and companies which come under a specific theme. The theme selected should potentially have huge growth because of current socio-political and macro-economic factors.
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The investment focuses on stocks and sectors that are in line with the chosen theme irrespective of the capitalization size and sectors.
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This is an unconventional way of investing where you grab the opportunity of the current economic situation and select a theme that may fetch you unexceptional returns as compared to other equity funds.
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This is a high-risk bet which is capable of giving skyrocketing returns.
Are you thinking of investing in thematic funds?
Mutual funds are based on the fundamentals of diversification so that risk is spread. But thematic funds go against this fundamental of diversification. Only if you want to generate returns higher than market returns then go for thematic funds. But remember it can cause great losses too, hence high risk. Not all themes give results some may take years to generate high returns. Only if you are palatable to high risk and long term, you should opt for this bet. The idea here is to buy at a lesser cost and sell at a higher price.
How much of your money should you invest in thematic funds?
One approach would be investing 10-15% of your portfolio in thematic funds. If you invest more of your portfolio, then the risk of losing much will be high. And if you invest less than this, then you may earn more if the theme works well. The other approach comes into the picture if you are handling your mutual funds in the Core & Satellite approach. You need to consider thematic funds as part of the satellite segment as this is a high-risk category.
Summing up
To start with you have to study the market well and look for the areas that will boom in the next few months or years. Research these areas and choose the theme that you want to invest in. Thematic funds will consist of 80% of equity funds invested in stocks of the sectors that are in line with the theme selected. Thematic funds can either fetch you good returns or erode you with huge losses. Only when you have a high-risk appetite, go for thematic funds. This is a risky venture as you have invested all in sectors woven around a single industry and you may lose all or get good returns from each sector. First-time investors are not advised to try thematic funds. It is meant for seasoned investors with good market knowledge. Few may give good returns in a short duration but most need 7-10 years to give extraordinary returns. If you are looking for quick money then this is not for you. Also once you invest, you have to very closely monitor the market so that you can judge when to exit with good returns. If you miss the profitable cycle, you may incur losses.
