Thematic Funds: Should You Bet On Them?

Thematic funds are riskier but offer potential for higher returns provided the themes are chosen based on the growth potential of the companies and sectors comprising the theme.



Mutual funds offer a wide variety of funds to choose from based on your needs. The Securities and Exchange Board of India (SEBI) has made it even simpler for investors by introducing a re-categorisation circular which clearly defines each category. It even specifies that fund houses can have only one fund from each category. Thematic fund is one such category. Thematic funds are mostly confused with sector funds. However, thematic funds are very different in approach than sector funds. According to SEBI’s re-categorisation circular, thematic funds are those which have minimum 80 per cent of total assets invested in equity and equity-related instruments of a particular theme.

Difference between thematic and sector funds

As stated earlier, investors are always confused between sector funds and thematic funds. They almost use it interchangeably. Most of them consider them as same. There is only one thing in common when it comes to sector and thematic funds; that is, they are very specific and focused funds when compared to other funds in the equity category. They are focused on a particular sector or theme. It should not be confused with focused funds, which is a different category as 'focus' means limited companies in a portfolio.

Apart from this, nothing is similar when we compare sector funds with thematic funds. Though some stocks may overlap, the investment approach and objectives of both funds are entirely different. Sector funds invest predominantly in a particular sector, whereas thematic fund investment revolves around a particular theme. Thematic funds are quite broader than sector funds. The fund that invests in banking stocks is a good example of sector fund. On the other hand, if a fund has an infrastructure theme, it can invests in shares of companies that is related to infrastructure sector. Hence, such funds are free to invest in housing, cement, banks, steel, paints, etc. Thematic are much more diversified than sector funds.

"Other thematic funds have the highest AUMs among the funds under thematic category, which is around 33 per cent. This is followed by MNC theme and PSU theme, which contributes 26 per cent and 20 per cent of total AUMs in the thematic category respectively."

Thematic Family

As of now, there are majorly 5 members in the thematic family, which are explained below

Thematic Others- In this class, those funds are included which cannot be classified under other family members. Some examples are manufacturing, business cycle, etc.

Thematic MNC- These funds revolve around the multinationals theme. This means that these funds specifically invest in shares of companies that are multinationals and are operating in India

Thematic PSU- As the name itself suggests, these funds invest in shares of companies that are public sector undertakings.

Thematic Consumption- These funds invest in shares of companies that are involved in consumption product business. It may be FMCG, automobile or consumer durables.

Thematic Energy- These funds invest in shares of companies that are involved in energy business. It may be proper energy company or banks or other companies which aid the business.



So, if we look at the above graph, we can see that in the last one year ending March 2019, all themes have generated negative returns, of which PSU thematic category underperformed the most with negative returns of 6.82 per cent. This, of course, was due to the fact that the year 2018 was overall a bad year for the stock market. However, the story completely changes when we look at these funds from a long-term perspective with positive returns in 3 years as well as 5 years. In the 3-year period, the thematic funds outperformed other family members with 15.95 per cent returns, but in the 5-year period, thematic MNC scores over others with 17.78 per cent returns. Having said that, overall thematic consumption did better. Even during the year 2018, it was the least falling theme, with negative returns of mere 0.03 per cent.

Should you invest?

As we have went through all the bits and pieces of thematic funds, now it is time to take decision. So, is it worth investing in thematic funds? It depends on various things. Your risk profile is one of the determinants of whether or not to go for the thematic funds. If you are conservative to moderate risk taker, then you should refrain from investing in these funds. But if you wish to invest in them, allocate only 5 to 10 per cent of your entire portfolio to these funds. However, moderately aggressive and high risk takers can very well invest in them and take this as an opportunity to earn that extra return on your portfolio. Apart from the risk profile, having a financial plan in place is crucial. If you are still on your way to fulfil your needs, then it would be better to stay away from these funds. But in case all your needs are taken care of and now your only goal is to create wealth, then you can invest in these funds to increase your wealth further. Remember, the time horizon also has a very important role to play. If you wish to invest in thematic funds, keep your investment horizon of 7 years and above.



Things to keep in mind before investing

If you have made your mind to enter into a thematic fund then remember to take a position with a stop loss. A stop loss of anywhere between 15 to 20 per cent would be ideal. If you see the value of your fund fall below the said levels, then without giving a second thought, just exit the particular fund. Though these funds may eventually bounce back, the cost of time value would be much higher. Even your opportunity cost would be higher as you would have an opportunity to exit the fund and invest in other funds.

Keep a watch on the earnings of the company forming part of the overall theme. You need to check whether the earnings of the sectors in that theme are actually growing. If that is not the case, then you should avoid taking risk, and if you are already invested, you should exit from the funds. It would be like remaining invested in infrastructure funds even after 2009, despite the boom that had happened in the sector in the year 2007-08. The earnings were not able to keep pace with the valuations after that.

You need to ask yourself whether the theme invests in enough quality stocks. This question is important as this will help you to avoid funds that are launched on the verge of market bubbles. You need to be extra careful when you are investing in thematic funds. Before investing, you should have a clear idea as to whether or not the theme is sustainable and if it is cyclical, where it is now in the cycle. You need to ensure that the theme you are investing in offers the potential to grow your investments. For instance, the consumption theme has sustained for so long because these companies have an all-weather business. Do not get gratified by the commodity themes, as they have always been cyclical in nature. You need to have the knack of identifying the stages of cycles so as to time the entry and exit from such funds.