By Shreyash Devalkar
Thematic funds are a category of mutual funds that focus on a specific theme or sector rather than a broader market index. Unlike diversified equity funds that invest across various sectors, thematic funds are designed to capitalise on emerging trends, ideas, or industries within a particular sector. They align investments with emerging trends and offer a focused yet diversified approach to wealth creation.
Who should invest in thematic funds
Since these funds gain exposure to a single sector, they feature under the ‘very high risk’ category on the riskometer. It is imperative to note that not all thematic funds will effectively profit from the growth of their targeted trend, making it even more crucial that investors carefully assess their risk appetite. These funds can be a part of an investor’s satellite portfolio, and not the core one. Also, as markets face volatility, the probability that the fund too faces volatility is relatively high. Therefore, those who are willing to ride out multiple business cycles and invest in the long run, can consider investing in them.
Leverage forward-looking themes
When investing in a thematic fund, investors must look at themes that have the potential to scale up in the future to capitalise on the inevitable long-term opportunity. It may so happen that valuations are not entirely reflective of the trends in the current environment. The key is to identify such trends, a task easier said than done. Investors must also note that the relationship between stock returns and earnings growth is usually indeterminate. Therefore, one must look at growth relative to the market’s expectations. This requires the investor to understand what the market is currently pricing in, a deep understanding of the macro story, and how the landscape might evolve.
Research the fund’s strategy
Thematic funds tend to be more volatile than diversified equity funds. Since they concentrate on a specific sector or theme, their performance can be greatly influenced by the trajectory of that sector, making it imperative that investors understand the underlying fund strategy before investing. Even within a specific theme, different funds may adopt different investment approaches. For instance, one fund could focus on ‘growth’ as an investment strategy and the other could focus on ‘value’ or there could also be a fund that has a ‘blended/combined’ approach. These strategies will directly co-relate to the kind of companies/stocks that the fund ultimately invests in.
Know your risk appetite
Thematic funds can be suitable for investors who have a strong conviction about a particular sector’s growth potential. If you closely follow a specific industry or believe in a particular trend, a thematic fund can be a strategic addition to your portfolio. However, these funds are not for everyone, especially those looking for a more balanced and less volatile portfolio. Understanding individual risk appetite is significant as it will allow a window of insight into the investor’s risk tolerance bandwidth and empower him/her to take well-informed decisions.
Thematic investing is fast emerging as a novel category that has the potential to deliver value across the board and even beyond benchmark indices.
The writer is head, Equity, Axis Mutual Fund.