September 20, 2023

Thematic Funds

Thematic Funds

A thematic fund is a type of mutual fund that invests in a particular theme. They invest in stocks of companies related to the theme, such as green energy, infrastructure, manufacturing, health care, make in India, etc. These funds invest in sectors that have the potential to offer excellent returns in the long term. However, this fund is not diversified. So make sure to consider your risk appetite, the objective of your investment, and the time horizon. 

Content:

Thematic Mutual Funds Meaning

A thematic mutual fund is a type of mutual fund that invests in a particular theme and allocates its investments to stocks of companies associated with that theme. Examples of themes could include Make in India, Infrastructure, clean energy, or technology.

In other words, a Thematic fund is a type of equity mutual fund that invests 80% of its assets in stocks of companies that align with the goal of the fund’s theme. 

Suppose an asset management company adopts a thematic approach focused on sustainable agriculture. In this case, the thematic fund manager would invest in stocks of agricultural technology companies, fertilizer manufacturers, farm equipment providers, and other entities within the agricultural sector. The aim is to capture the potential growth and opportunities arising from the theme of sustainable agriculture.

Thematic Funds – Features

The main feature of thematic funds is they are investment strategies centered around specific themes or trends, such as clean energy, healthcare, technology, or infrastructure. These funds are designed to capitalize on the growth potential of these emerging sectors by investing in related companies, thus providing investors with the opportunity to benefit from the long-term growth these themes are anticipated to generate.

Other features of thematic funds are given below: 

  • Thematic funds are designed around themes or trends like clean energy, healthcare, technology, or infrastructure. These funds aim to capture the growth potential of these themes by investing in companies related to the chosen theme.
  • Thematic funds are managed by experienced professionals with expertise in identifying and selecting companies that fit the theme. The fund manager’s role is actively managing the portfolio and making investment decisions based on the theme’s prospects and market conditions.
  • Thematic funds have the potential to generate alpha, which refers to returns that exceed the benchmark or market average. The focused approach of thematic investing, combined with the fund manager’s expertise, can lead to outperformance compared to broader market indices.
  • Thematic funds are typically suited for investors with a long-term investment horizon. The themes and trends they focus on may take time to materialize and generate returns fully. Investors who are willing to hold their investments for the long term can benefit from the potential growth and value creation within the chosen theme.

Best Thematic Mutual Fund

The best thematic mutual funds are given below in the table: 

Name of the fund NAV (May 19)5 Year CAGRExpense RatioSIP Minimum
DSP India T I G E R Fund (Growth)₹ 171.4612.7%2.22Rs. 1000
ICICI Prudential Infrastructure Fund (Growth)₹ 106.2915.7%2.22Rs. 1000
ICICI Prudential Manufacturing Fund (Growth)₹ 19.57NA0Rs. 1000
Sundaram Services fund (Growth)₹ 22.0355NA2.02Rs. 1000
Bank of India Manufacturing & Infra fund (Growth)
₹ 31.9811.4%2.51Rs. 1000
SBI Consumption Opportunities Fund (Growth)₹ 214.766611.8%2.32Rs. 1000
Nippon India Banking & Financial Services Fund (Growth)₹ 419.48549.7%2.02Rs. 1000
Nippon India Consumption Fund (Growth)₹ 129.415215.6%2.43Rs. 1000
Tata Resources & Energy Fund (Growth)₹ 28.634414.4%2.42Rs. 1000
ICICI Prudential Banking and Financial Services Fund (Growth)₹ 93.389.6%1.95Rs. 1000
Invesco India PSU Equity Fund (Growth)₹ 31.8312.3%2.46Rs. 1000
Kotak Infrastructure & Economic Reform Fund Standard Plan (Growth)₹ 40.11113.3%2.3Rs. 1000
Mirae Asset Healthcare Fund (Growth)₹ 20.508NA2.07Rs. 1000
Canara Robeco Consumer Trends Fund (Growth)₹ 72.6714.1%2.32Rs. 1000
Aditya Birla Sun Life Digital India Fund (Growth)₹ 118.8319.3%1.92Rs. 1000

Thematic Mutual Funds – Benefits

The main benefit of investing in thematic funds is that it is not restricted to investing in one type of sector or business; instead, thematic funds invest in various types of sectors or businesses that align with the theme of the fund.  

The other benefits of thematic mutual funds are given below: 

  • Diversification

Investing in this fund gives you diversification benefits as it invests in stocks of companies that belong to various sectors that match the goal of the fund’s theme. Diversification helps to reduce the risk and mitigate the impact of underperformance in a specific sector.  

  • High returns 

Thematic funds invest in sectors or businesses expected to benefit from a trend. If the chosen theme performs well, it can result in attractive returns for investors. By identifying and capitalizing on emerging trends, these funds have the potential to outperform broader market indices.

  • Long term investment 

Thematic funds are typically suited for investors with a long-term investment horizon. Investors who are willing to hold their investments for the long term can benefit from the potential growth and value creation within the chosen theme.

Thematic Funds Vs Sector Funds

The main difference between thematic and sector funds is that thematic funds invest in a certain theme that represents an idea or objective spanning multiple sectors. On the other hand, sector funds invest in a certain sector, such as IT, FMCG, banking, automobiles, etc. 

ParameterThematic FundsSector Funds
Investment FocusInvest in a specific theme that spans multiple sectorsInvest in a specific sector or industry
Returns PotentialHighHigh
VolatilityHighHigh
DiversificationRelatively more diversified due to exposure to multiple sectors related to the themeConcentrated exposure to a specific sector or industry
Investment Horizon5 to 7 years3 to 5 years
Suitable forInvestors with in-depth knowledge of the theme and its potential, higher risk toleranceInvestors with in-depth knowledge of a specific sector have higher risk tolerance

Thematic Funds Risk

The biggest risk with thematic funds is that they focus heavily on certain companies or sectors tied to a specific theme. This means these funds can be riskier than diversified equity funds because they’re not spread out across different types of companies. But they’re slightly less risky than sector funds which invest solely in one sector, as thematic funds have a bit more variety.

Other risks of thematic funds are given below: 

  • Thematic funds are highly exposed to the performance and risks associated with the chosen theme. If the theme experiences challenges, regulatory changes, technological disruptions, or other adverse events can negatively impact the fund’s performance. For example, a clean energy-themed fund may be affected by changes in government policies or fluctuations in renewable energy adoption.
  • Due to their concentrated nature, thematic funds may lack diversification across sectors and industries. This can amplify the impact of negative events within the chosen theme and increase volatility. A downturn in the specific sectors or companies related to the theme can lead to significant losses in the fund.
  • Thematic funds can experience higher volatility levels than diversified equity funds due to their concentrated exposure. The fund’s performance may be subject to significant positive and negative fluctuations, depending on the theme’s performance and its underlying companies.

Do you want to expand your knowledge about mutual funds? We’ve got a list of must-read blogs that will help you do just that. Just click on the articles to find out more.

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Target Maturity Funds
Types Of Hybrid Funds
Aggressive Hybrid Fund
Conservative Hybrid Fund
Credit Risk Fund
Floater Funds
What is nav
What Is CAGR In Mutual Fund

Thematic Funds – Quick Summary

  • A thematic fund is a type of mutual fund that invests in a particular theme. Examples of themes could include Make in India, Infrastructure, clean energy, or technology.
  • The main feature of thematic funds is that they invest in stocks across multiple sectors that align with the fund’s theme. 
  • The top thematic mutual funds are Tata Digital India Fund (G), SBI Banking & Financial Services Fund (G), Nippon India Pharma Fund (G), Kotak Pioneer Fund (G), and Kotak Pioneer Fund (Growth). 
  • The main benefit of investing in thematic funds is that it is not restricted to investing in one type of sector or business; instead, it invests in various types of sectors or businesses that align with the theme of the fund.  
  • The main difference between thematic and sector funds is that thematic funds invest in a certain theme that represents an idea or objective spanning multiple sectors. On the other hand, sector funds invest in a certain sector, such as IT, FMCG, banking, automobiles, etc. 
  • The main risk of a thematic fund is that its portfolio is concentrated in companies and sectors related to that theme. 
  • If you want to invest in mutual funds, open your Demat account with Alice Blue. They provide a selection of top funds across different categories, including equity, fixed income, ELSS (Equity Linked Savings Scheme), hybrid, and others.

Thematic Funds – Frequently Asked Questions

1. What Is a Thematic Fund?

Thematic funds are the type of mutual funds that invest in certain themes such as IT, rural development, FMCG, green energy, etc. These funds invest in a certain scheme to earn high returns as they see growth opportunities in the particular theme. 

2. What is an example of a thematic fund?

For instance, If a thematic fund invests in rural development, then the fund will be investing in sectors including agricultural products, chemicals, automobiles, fertilizers, etc. In other words, these funds invest in sectors and industries that contribute to the progress of rural areas. 

3. What are the top 5 thematic mutual funds?

The top thematic mutual funds are: 

  1. Tata Digital India Fund (G)
  2. SBI Banking & Financial Services fund (G)
  3. Nippon India Pharma Fund (G)
  4. Kotak Pioneer Fund (G)
  5. Kotak Pioneer Fund (Growth)

4. What is the difference between thematic and sector funds?

The main difference between thematic and sector funds is that thematic funds invest in a certain theme that represents an idea or objective spanning multiple sectors. On the other hand, sector funds invest in a certain sector, such as IT, FMCG, banking, automobiles, etc. 

5. What are the different types of thematic funds?

The different types of thematic funds are given below: 

  • Dividend yield funds 
  • PSU equity funds 
  • Energy funds 
  • MNC funds 
  • Consumption funds 
  • Other thematic funds 

6. Are thematic funds risky?

Investing in thematic funds is suitable for those with a long-term investment horizon of 5 to 7 years because of their high volatility and risk. Hence, investors should be patient and stay invested long-term to reap the maximum benefits. 

7. Are thematic funds safe?

Thematic funds are considered to be among the riskier categories of mutual funds. This is because these funds have limited investment opportunities as they create the portfolio around a specific theme.

8. Is ESG a thematic fund?

Thematic investing in the context of ESG (Environmental, Social, and Governance) refers to the approach taken by fund managers to identify and capitalize on macroeconomic trends that are expected to positively impact environmental, social, or governance outcomes in the long run. 

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