Thematic funds gained popularity in India only in recent times. With innovations steered by asset management companies, thematic funds have particularly garnered the interest of millennials. Thematic mutual funds are open-ended equity schemes that invest in equity or related instruments. It focuses on various businesses which are interlinked through a common theme. Some of the domains include banking, clean energy, and healthcare. They provide investors with exposure to a particular area of the market. Thematic investing can be attractive to investors who are looking at focusing their portfolio on a particular theme instead of investing in various types of stocks or other assets. This gives them a better grip on understanding an area and lets them invest their time and money in one area and not worry about other investment segments.
As per a recent Securities and Exchange Board of India (SEBI) mandate, 80% of asset allocation must be to equities and equity-related instruments. The current value of thematic funds is nearly 8 percent of all equity funds' investments, which is a little over Rs 1.2 lakh crore. In this article, we explore the nature of thematic funds and the various features that make them a popular investment option, the risks involved, and various other decisions that will help you make an informed decision in investing in these funds.
According to a CAMS report titled ‘The emerging force of the millennial investor is here to stay & grow’, registrar and transfer agent (RTA), mutual fund schemes that focused on a particular investment theme saw more first-time millennial investors since the financial year 2021. The report talks about the millennials who entered the mutual funds space for the first time in 2019-23. Of the 1.6 crore new investors who invested in mutual funds during 2019-23, close to 85 lakhs were millennials. Around 21% of new millennial investors began their MF investments with Thematic investing in 2022-23. As per financial analysts, the increasing accessibility of MF investment platforms during the COVID-19 pandemic made it easier for investors to learn about and invest in sectoral and thematic schemes. The millennials who stayed invested through this entire period had assets worth Rs 96,000 crore as of March 2023. Millennials are those born between 1981 and 1996.
Often thematic mutual funds and sectoral funds are confused with each considering how their features are loosely related to each other. So, here we talk about both with examples to help you tell them apart. Thematic focuses on a theme of industries while sectoral funds cover a particular sector. While they have a lot of commonalities, the former covers sectors that are relevant to their theme. For example, an infrastructure theme fund will invest in companies and sectors related to cement, steel, power, and machinery. Similarly, a fund that follows Environment, Social, and Corporate Governance (ESG) theme, would invest in companies that have fared in environmental, social, and (corporate) governance factors. Thematic investing relates to investing across different sectors and market caps that relate to a particular theme.
Meanwhile, sectoral funds aim to invest in companies working in a specified sector. For example in single sectors such as banking, pharma, FMCG, IT, auto, metals, etc. As these funds focus on one sector, they carry a high-risk possibility with them and come with high-return potential when the sector performs well. Sectoral funds will be better suited for investors ready to take up high risk. However, thematic investing tends to be less risky, making them the better choice for investors.
Advantages of Thematic Funds
Thematic mutual funds have some great advantages. Read below to know more:
Disadvantages of Thematic Funds
Thematic mutual funds have some prominent disadvantages, some of them are as follows:
Thematic investing is quite similar to investing in any other mutual fund. While you have a fund manager allocated to take care of the investments, it is better if you can do your fair share of research and know how the process functions. It is advisable to pick a fund of your choice and let your expectations be made known to your broker, for example, if you want to invest either a considerable amount or through a SIP. However, as thematic mutual funds are centered around high risks, it is better to check with your fund manager, which investment comes with high risk and those that are risk-free.
Considering the risk factor, an investor should avoid investing in funds that they have kept aside for financial security or for retirement. It is advisable to look at the investment as a long-term equity investment and wait to redeem when the pricing is on the higher side. Thematic funds generally attract an expense ratio of 2-2.3%, which is higher than other types of mutual funds. Most of the other mutual funds charge an expense ratio of 1.4-1.8%.
10 Best-Performing Thematic Funds as of June 24, 2023
Taxation on thematic mutual funds is similar to the way any other equity mutual fund works. If you redeem your investment within 12 months of purchase, your returns will be calculated in the category of short-term capital gains. You will have to pay a tax of 15% alongside a surcharge and cess. This applies irrespective of your income tax slab. But, if you redeem your investment only after 12 months or later, the tax you will pay on your returns will be 10%. Moreover, investors enjoy a tax exemption of Rs 1 lakh on their long-term capital gains.
The final decision to invest or not in thematic mutual funds is based on one's financial goals and risk tolerance. While these types of funds can surely offer high returns compared to traditional funds, they also carry high risks. Before making a decision, we advise you to talk to a financial advisor who understands the volatility of the market. We at Moneyedge provide overall financial advice based on our client's needs. We understand your financial goals and create customized plans knowing the market trends and foreseeing changes. For more information on Moneyedge's services, you can write to us at firstname.lastname@example.org or alternatively call us at 8699993333. To know more about our branches and timings, please click on this link.