By Moinak Maiti & Parthajit Kayal
Studies show that in recent years thematic investments have grown across the globe. Now the Indian economy is witnessing several important reforms and is in a transition phase. So, do Indian investors need to consider thematic investments?
Concept of thematic investment
The definition for thematic investment is a bit ambiguous and there is no standardised definition of it. Thematic investments are fundamentally the investment strategies that help you to identify the prevailing trends/themes for making investment decisions. Thematic investment strategies are meant for a longer duration and need to be well-researched before making such investment decisions.
The impact of the ongoing Covid-19 pandemic is not uniform across the companies or sectors or countries. A successful thematic investor aims at identifying those trends/themes well in advance for making investments. Hence, thematic investment is all about identifying such trends/themes that are spurred due to the economic structural changes and will have a longer impact.
Thematic investment could also be related to achieving certain objectives such as promoting environmentally sustainable investing. Statistics indicate that the three sustainability indices of BSE (S&P BSE Carbonex, S&P BSE Greenex, and S&P BSE 100 ESG index) have outperformed the Sensex during the ongoing pandemic.
Certain themes such as ESG investments have universal appeal. However, others are more heterogeneous. Thus, the generation of new themes is a continuous process and several of them elapse quickly. Those forgotten themes could be a disappointment for the thematic investors.
It is true that thematic investment is appealing to investors. However, thematic investment would work only when the trends/themes continue.
Thematic investment in India
Thematic investment has received significant attention among Indian investors in recent years. Today the National Stock Exchange (NSE) of India has 20 thematic indices covering different themes ranging from commodities to ESG and many others. Similarly, BSE has six thematic indices based on private banks, PSU, and others. In addition, a considerable number of thematic mutual funds are also traded in the Indian stock markets.
Some of the well-known thematic mutual funds traded in Indian stock markets are SBI Magnum COMMA Fund, Tata Ethical Fund, Franklin India Opportunities Fund, and others.
Thematic vs sectoral vs regular MF
How are thematic funds different from the sectoral funds or regular mutual funds? Thematic funds have a much broader aspect than that of the sectoral funds as they may include different companies from different sectors united by theme(s). For example, Nifty Infrastructure Index is an infrastructure thematic index that consists of companies representing diversified sectors belonging to telecom, power, airlines and others. Similarly, all mutual funds are not thematic mutual funds. Tata Ethical Mutual Fund is an equity scheme based on the Shariah principles. It largely comprises equities of the companies that are compliant with the Shariah principles.
Thematic investment looks very attractive but is very risky. Before investing in such a thematic investment, one should do a critical analysis. A critical analysis should be done with respect to theme prospect, investment risk, taxes, and others. Average-risk takers are not encouraged to invest in such thematic investments. It is well-proven that it is impossible to beat the market continuously just by implementing a particular investment strategy. Hence, such thematic investments need to be reviewed over a period of time for overall success.
Maiti is associate professor, National Research University Higher School of Economics, Saint Petersburg and Kayal is assistant professor, Madras School of Economics
