What are Thematic Mutual Funds? thematic funds meaning, advantages & examples.

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Thematic Funds meaning

A thematic fund is a fund that invests in a particular theme such as banking, IT, infrastructure, etc. Thematic funds are equity mutual funds. These funds are formed to take advantage of a particular theme like housing, rural consumption, etc. 

These funds are risker than the regular diversified funds as they make not deliver the desired return for an extended period of time. Which make them high risk, high return investments.

As per SEBI guidelines, a thematic fund must invest a minimum investment of 80 percent of its total asset in equity and equity-related instruments of a particular theme.

How does the thematic fund work?

Thematic Fund managers take a top-down approach to invest. This means fund managers or investors first identify a theme & its future opportunity & invest in it. 

Thematic funds are different from large-cap funds, small-cap funds, mid-cap funds, etc., as they invest only in a particular company related to a theme. 

For Eg:- An infrastructure theme fund will invest in cement, housing finance, steel, etc companies.

An IT thematic fund cannot invest more than 20% in other types of companies as per SEBI guidelines. This type of fund is more diversified as compared to a sectoral fund but less as compared to a diversified regular fund

Advantages of thematic equity funds.

Thematic funds are more diversified than sectoral funds. The thematic fund invests in different types of companies within a theme.

For Eg:- Natural resources & energy will invest in steel, renewable energy, power companies, etc. Whereas a technology sectoral fund will only invest in IT companies like Infosys Ltd, TCS Ltd, HCL Technologies Ltd, etc. 

Can you time the theme?

If you are able to time a theme right you can achieve an extraordinary return. But mutual fund companies usually come with their NFO (NFO full form is New Fund offer) when a theme is at its peak. An example is infrastructure funds in 2007-08 which underperformed for a long period of time.

Who should invest in this fund?

Thematic funds are high-risk, high-return investments. Investors having a high-risk appetite can invest in it.

People who have in-depth knowledge of a theme should only invest in this fund only because timing a theme is very difficult. A new investor is better off investing in regular diversified funds.

Only having in-depth knowledge is not effort; an investor should also have knowledge of valuation. One of the matrices that can be used is the historical 10 years average P/E. 

People who have at least 5 or more years on the investment horizon should invest in this type of fund. As described earlier the infrastructure theme has not performed for an extended period of time, other themes may behave in the same ways.

Note:- Regular diversified mutual funds will have stocks covered by the thematic funds.

For Eg:- Banking was a hot sector so mostly all diversified mutual funds had a large part allocated to it & at the same time there were banking theme funds in the market.

Sector fund vs thematic fund

Sector funds are different from thematic funds in the area of investment options available.

Difference between sectoral funds & thematic funds. Sectoral Funds invest only in companies of one sector. Thematic funds invest in companies from different sectors that are tied to the theme the fund has. 

Sectoral funds are less diversified as compared to thematic funds. So they are also at greater risk than the latter.

For Eg:- A banking & finance service sectoral fund can only invest in a bank, nbfc, insurances & amc; whereas an infrastructure thematic fund can invest in a housing finance company, steel, bank, construction, etc.

Top 5 thematic mutual funds

The below scheme names are just examples, not recommendations.

Fund name Annual return
SBI Magnum COMMA Fund 17.04%
SBI Magnum Equity ESG Fund 13.89%
Franklin India Opportunities Fund 13.79%
ICICI Prudential FMCG Fund 12.64%
Nippon India Quant Fund 12.12%

The above list will obviously change over time.

Also Read : Taxation on Equity Mutual Funds.

Also Read : 5 must-know point’s for stock market beginners.

Disclaimer

Mutual Fund investments are subject to market risks, read all scheme related documents carefully. The NAVs of the schemes may go up or down depending upon the factors and forces affecting the securities market including the fluctuations in the interest rates. The past performance of the mutual funds is not necessarily indicative of the future performance of the schemes. The Mutual Fund is not guaranteeing or assuring any dividend under any of the schemes and the same is subject to the availability and adequacy of distributable surplus. Investors are requested to review the prospectus carefully and obtain expert professional advice with regard to specific legal, tax and financial implications of the investment/participation in the scheme.

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