Last updated:November 16, 2024, 11:46 AM IST

Thematic funds can offer significant benefits, including exposure to emerging trends,

Know what distinguishes thematic funds from ordinary funds

Imagine investing in a way that aligns not only with financial goals, but also with transformative trends. Whether it’s the rise of green energy, the digital revolution or the rise of domestic consumption, thematic funds open a door to opportunities tied to these big ideas. By targeting companies that benefit directly from such themes, these funds allow investors to bet on the future – often across industries but under a unifying narrative.

In India, thematic funds gaining traction as they let investors ride the wave of emerging trends such as renewable energy, public sector growth or even multinational leadership. But as exciting as these opportunities may seem, they require careful consideration of the risks. Let’s delve into how these mutual funds work, their benefits and what makes them different from traditional investments.

What are thematic funds?

According to the Association of Mutual Funds in India (AMFI), thematic funds are specialized fund schemes that focus on investing in companies aligned with a particular theme or trend. These themes often revolve around industries, ideas or structural changes expected to experience growth, such as clean energy, technology or consumerism.

Unlike sector funds, which concentrate on a single industry, thematic funds span multiple industries but within the boundaries of the chosen theme.

In India, popular themes are dividend yield, PSUs (Public Sector Undertakings), MNCs (Multinational Corporations), energy and consumption. In addition, niche themes such as manufacturing, exports, services and transportation are also prominent, albeit with fewer fund options.

These funds are actively managed, giving investors an opportunity to benefit from high growth trends while aligning their investments with personal beliefs or values. However, their focused approach carries higher risks, requiring thorough evaluation and consultation with financial advisors.

How does thematic investing work?

Thematic investing is based on the belief that certain trends or industries will outperform others over time. By early identifying these structural or macroeconomic changes, the theme funds aim to invest in companies that can benefit directly. For example, a thematic fund focused on renewable energy might include companies in solar energy, wind energy and battery storage technology.

Fund managers actively select and manage portfolios that align with the theme, often across traditional sector boundaries to maximize exposure to the targeted trend.

Advantages of investing in thematic funds

Exposure to high growth sectors

These funds provide access to sectors poised for significant expansion. For example, renewable energy funds can benefit from the global drive towards sustainability.

Diversification within the theme

Although focused, thematic funds diversify within their theme and spread risk across multiple companies and industries associated with the theme.

Adaptation to personal values

Many thematic funds resonate with investors’ values, such as ESG (Environmental, Social, and Governance) funds for socially conscious investors.

Potential for long-term returns

If the theme works well, these funds can significantly outperform broader market indexes, making them attractive for long-term investment goals.

Risks associated with thematic funds

Concentration risk

The focused nature of theme funds makes them vulnerable if the theme underperforms or is affected by regulatory or economic changes.

Volatility

These funds tend to exhibit higher volatility compared to diversified funds due to their reliance on specific trends or sectors.

Liquidity risk

Some funds may invest in small or mid-cap stocks, which may be illiquid, particularly during adverse market conditions.

Performance risk

Thematic funds may underperform if the expected growth of the theme is not as expected, leading to returns below the broader market index.

Takeaways for investors

Thematic funds can offer significant benefits, including exposure to emerging trends, diversification within a focused area, and alignment with personal values. However, these funds are not suitable for all investors due to their inherent risks and volatility. Before you invest:

Understand the theme: Make sure the theme aligns with your financial goals and risk tolerance.

Evaluating risks and rewards: Consider the fund’s past performance, fees and strategy.

Consult experts: Work with a financial advisor if you are unsure about the suitability of thematic funds for your portfolio.

Disclaimer: Investments in fund units are subject to market risks. Read all scheme-related documents carefully.