Should you bet on thematic funds?
Thematic funds are the ones that seek to invest in various themes such as manufacturing, business cycle, MNC, PSU, consumption, energy, ESG, etc. However, do not confuse it with sector funds. Sector funds usually invest in different sectors such as banking & financial services, technology, pharma, and healthcare, etc. The only thing in common between thematic funds and sector funds is that, due to its focussed approach, the portfolio is quite concentrated in nature. However, apart from this, there are no similarities between thematic and sectoral funds. Although, there are chances that you might find the same stock in thematic as well as sectoral funds, with completely different investment objectives.
Other thematic funds which include special situation funds, business cycle funds, quant funds, etc. have the highest AUM, contributing 39 per cent of the total thematic funds' AUM. This is followed by the ESG theme and Consumption theme, which contributes 18 per cent each of the total AUM in the thematic category.
Dissecting the above graph clearly shows that the return in the last one year is purely due to the momentum in the stock markets, where FIIs were the net buyers who bought heavily into Indian stock markets. However, when we look at the three-year and five-year trailing returns then, it is quite depressing for the risk that it undertakes.
Aditya Birla Sun Life MNC Fund is the oldest thematic fund in this category, which was launched on April 22, 1994. Followed by that in the same year, on September 30, SBI Magnum Global Fund was launched.
Things to keep in mind before investing
If you are planning to invest in a thematic fund, then one thing to keep in mind is that they are quite risky. Secondly, these funds have cycles like sector funds. Each theme may perform differently in different market cycles. Therefore, having complete knowledge of when to buy which theme is quite important. Further, you just cannot buy and hold these funds for ages. You need to be quite active while investing in these funds, though not as active as you might get while investing in the stocks. Hence, having a tactical approach is vital. This can be done by deciding when to enter and when to exit. Here, moving averages might help you decide your entry and exit. For instance, if the 50-day moving average (DMA) is crossing above the 200-DMA, then make an entry. However, if 50-DMA crosses below the 200-DMA, then make an exit. Nevertheless, there is no right formula for entry and exit.
Is it a good idea to invest?
This depends on various factors. Your risk profile is one of the determinants of whether or not to go with thematic funds. If you are a conservative investor then, refrain from investing in these funds. Moderate investors, on the other end, can have limited exposure to these funds, while allocating not more than 5 to 10 per cent of their entire portfolio to these funds. Having said that, aggressive investors can very well invest in them and also, take this as an opportunity to earn that extra return on their portfolio.