Thematic Funds are the kind of mutual funds that are invested in stocks of a particular theme. This theme could be anything – international stocks, multi-sector stocks, commodity stocks, rural India, infrastructure stocks, etc. Thematic funds may be equity funds or debt funds; the only condition is that they have a theme to them.
Advantages of Thematic Funds
The following are the benefits of investing in theme-based funds:
- Thematic Funds are more focused and semi-diversified.
- Theme-based funds are high-risk and high-return, but can be whimsical. The performance of the funds depends on the limited number of companies/sectors being invested in.
- If one of the companies has a long winning streak, you will benefit highly, but the moment one of two of the stocks start plunging, you will incur losses. Thus, Thematic Funds are better for short- and medium-term investment than for long-term investment.
- Theme-based funds are best suited to mature investors and those who follow market trends and can make analytical decisions.
Disadvantages of Thematic Funds
Thematic Funds also have their disadvantages. Some of the prominent ones are listed below:
- The fund names may not indicate the real theme of the fund. If you are a newbie investor or have insufficient experience in mutual funds, you will not be able to understand the fund’s portfolio unless you read the prospectus, investment objective, fund manager’s background, etc.
- You cannot have Thematic Funds as your core portfolio due to its high-risk nature. Ideally you should limit your investment in theme-based funds to 10-15% of your portfolio.
- It is difficult to plan a strategy for Thematic Funds because there is no comparable fund or benchmark.
- If the funds are international, you cannot predict the play of factors such as currency values on your investment.
- Expense ratio for theme-based funds could range between 2.25%-2.5%, which is slightly more than what diversified equity mutual funds would cost you.
Here are some examples of theme-based infrastructure funds and their returns:
|Fund Name||NAV||1-Year Returns||2-Year Returns||3-Year Returns|
|BOI AXA Tax Advantage Fund – Direct Plan – Growth||Rs.60.6||31.90%||62.82%||54.00%|
|IDFC Tax Advantage (ELSS) Fund – Direct Plan – Growth||Rs.60.9||22.16%||57.75%||48.22%|
|Birla Sun Life Tax Relief 96 – Growth – Direct Plan||Rs.32.7||20.91%||49.52%||49.25%|
|Axis Long Term Equity Fund – Growth||Rs.42.3||20.57%||42.49%||35.86%|
|L&T Infrastructure Fund – Direct Plan – Growth Option||Rs.17.8||15.93%||71.10%||61.31%|
|Taurus Infrastructure Fund – Direct Plan – Growth Option||Rs.26.4||15.80%||59.36%||42.57%|
|JM Tax Gain Fund (Direct) – Growth Option||Rs.17.6||15.35%||56.27%||46.01%|
|Invesco India Infrastructure Fund – Direct Plan – Growth Option||Rs.19||14.54%||49.80%||31.26%|
|Escorts Infrastructure Fund – Growth Option – Direct Plan||Rs.8.8||14.29%||41.71%||25.89%|
|IDFC Infrastructure Fund – Direct Plan – Growth||Rs.18.4||13.83%||74.29%||54.44%|
*Data accurate as on May 23, 2018.
Difference between Thematic Funds and Sector Funds
Thematic Funds are often confused with Sector Funds, but there is a lot of difference between the two. Let us look at a few of the differences:
- Sector Funds invest in 1 to 3 specific sectors – for example, the IT sector, the pharmaceutical sector, or the oil and natural gas sector – while Thematic Funds follow a theme in investment among different available stocks.
- Theme-based funds are more diversified and have a larger scope than sector funds, but not as good as diversified equity mutual funds.
- The risk level is high in both Sector Funds and Thematic Funds. Sector Funds, however, are riskier than Thematic Funds. The performance of Sector Funds depends on particular sectors, and if that sector is in a bad patch, the entire fund will be affected. Theme-based funds, on the other hand, depend on the performance of different stocks in different sectors, which mitigates the risk considerably. It is still not an optimal situation, as the fund is not diversified enough to handle a rough patch in the limited stocks it has invested in.
If you plan to invest in theme-based funds, then ensure that you study carefully the portfolio of the funds and the market you are entering. You will need to choose a theme that has good track record and go for a fund manager who has experience in making wise investment choices. Never make Thematic Funds your sole investment in mutual funds – diversify as much as possible to avoid losses.
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