Thematic Funds: Diversify Your Portfolio, Invest In The Future

Thematic funds are a type of investment strategy that focuses on broader macro-level trends and the businesses and sectors that are likely to benefit from them. These funds are typically based on a specific theme, such as emerging technologies, ESG (environmental, social, and governance), or demographic changes, and invest in companies across various sectors that align with that theme. While thematic funds offer the advantage of diversification and the potential for high returns, they also carry higher risks due to their dependence on specific ideas or themes. This type of investment approach suits investors seeking long-term growth and aligns their investments with their interests and values.

Thematic funds are a type of mutual fund

Thematic funds are suitable for investors with a high-risk appetite and those seeking returns in the long term. They are also a good option for well-informed and evolved investors who have a fair understanding of the different sectors that the fund's theme covers.

Thematic funds offer more diversification than sectoral funds, which are restricted to a single sector. This means that even if companies from one sector are not performing well, the other sectors in the fund's portfolio can protect it from failing miserably.

However, it is important to note that thematic funds are one of the riskiest categories of mutual funds. This is because the scope of investment opportunities is restricted to the chosen theme, and if that theme doesn't play out, the risk of losses is high.

When considering investing in thematic funds, it is advisable to have a diversified portfolio, a good understanding of the particular sector or theme, and be aware of the exit timing.

They allow investors to pursue exposure to specific ideas

Thematic funds allow investors to pursue exposure to specific ideas by investing in stocks that are united by a predetermined theme. For example, a fund with infrastructure as its theme will invest in companies from sectors such as steel, cement, and construction. Similarly, a fund with an environmental, social, and governance (ESG) theme will invest in companies that have performed well in terms of ESG factors from different sectors. This approach allows investors to align their investments with their interests, values, and beliefs.

Thematic funds provide investors with exposure to long-term trends, values, and strategies that are shaping the world. For instance, a fund may focus on disruptive communications, which includes companies from different sectors such as semiconductor producers, cell phone tower operators, and social media companies. This approach enables investors to benefit from emerging industries, innovative business models, and technologies that are changing the status quo.

Thematic funds also offer more diversification than sector funds. While sector funds restrict an investor's portfolio to a specific sector, thematic funds invest across different sectors as long as they tie to the theme. For example, a manufacturing-themed fund may invest in companies from various industries, such as construction, chemicals, and engineering. This diversification helps protect the portfolio from the underperformance of a single sector.

Additionally, thematic funds can provide market-beating returns if the chosen theme performs well. However, identifying the right theme requires monitoring and following news and headlines regularly. Thematic funds are also considered riskier than other types of funds because they are dependent on a specific idea or theme, which may or may not generate high returns.

They are high-risk, high-reward investments

Thematic funds are high-risk, high-reward investments. They are a type of equity mutual fund that focuses on emerging trends and specific investment ideas. While they offer the potential for high returns, they also come with significant risks and volatility.

The high-risk nature of thematic funds arises from their narrow focus and dependence on specific themes or ideas. These funds invest in stocks united by a predetermined theme, which may involve multiple sectors. This semi-diversified approach means that if the chosen theme does not perform as expected, the risk of losses is high. As such, thematic funds are generally recommended for investors with a high-risk appetite and a long-term investment horizon.

Thematic funds are susceptible to downturns in the chosen theme or sector. A downturn in the sector can result in heavy losses due to the lack of diversification in holdings. Additionally, the success of thematic funds depends on correctly identifying trends and the companies that stand to benefit from them. This requires a deep analysis, strong research, and a good understanding of the businesses and their underlying drivers.

However, the high-risk nature of thematic funds also offers the potential for high rewards. If an investor gets the theme right, thematic funds can generate outstanding returns. These funds allow investors to capitalise on future trends and invest in "businesses of the future". Thematic funds provide an opportunity to generate alpha, or excess returns over the benchmark.

It is important for investors to carefully consider the risks and rewards of thematic funds before investing. While they offer the potential for high returns, they may not always generate sufficient returns to compensate for their risk. Additionally, the expense ratios for thematic mutual funds tend to be higher compared to other mutual funds due to the specialised nature of the investments.

They are best suited to investors with a good understanding of the businesses

Thematic funds are best suited to investors with a good understanding of the businesses involved. This is because they require a decisive understanding of the impact of all trends on various regions and sectors, as well as a forward-looking thought process to be able to understand future trends.

Thematic investing is a form of investment strategy that identifies broader macro-level trends and the businesses and sectors that stand to benefit from them. It involves investors aiming to identify these trends in advance and investing in the underlying businesses. A successful investor will be able to identify and understand these trends and businesses, and make a decisive call on whether the areas can help them get good returns.

Thematic investing is generally a top-down investment approach that identifies macro-level trends and invests in the companies that stand to profit from them. It requires identifying the 'trendsetters' and the 'trends', and understanding whether the trend is structural in nature, and whether it has long-term implications. Once the trend is identified, the investor must look at all the sectors and businesses that could benefit from the occurrence of this long-term trend.

Thematic investing is not for the faint-hearted. It is a high-risk, high-reward strategy. Thematic funds are dependent on a specific idea or theme, which may or may not fetch high returns, especially during various market cycles. This is why a good understanding of the businesses involved is so important.

They can be used to invest in long-term trends

Thematic funds are a great way to invest in long-term trends. They are a form of investment strategy that identifies broader macro-level trends and the businesses and sectors that are likely to benefit from them. These funds are based on a particular theme that can be multi-sectoral and multi-economic. For example, a fund with infrastructure as its theme will invest in companies from sectors like steel, cement, and construction.

Thematic funds are ideal for investors seeking returns in the long term. Sometimes, it takes time for a theme to operate at its full potential. For instance, while we knew about the potential of software and internet technology in the early 90s, it took 20 years to see these themes reach their peak. Thus, thematic funds are a good option for investors who are looking for good returns over time.

Thematic investing also helps investors capitalize on future trends. Its forward-looking nature allows investors to put their money in 'Businesses of the Future'. It involves aligning investment philosophies and beliefs with the investments. For example, an ESG (Environmental, Social, and Governance) Mutual Fund invests in companies that score high on ESG parameters and have no evidence of any harmful environmental impact.

Thematic funds can also be used to invest in long-term trends by identifying the right trends and the companies that could be market leaders. For instance, if someone believes that blockchain is the future and will be extended to most sectors, they can identify the sectors and businesses that will benefit from this technology.

However, it is important to note that not every company will benefit from a particular theme. Only those that make quick decisions, operate efficiently, and stand out will benefit exponentially. Additionally, thematic funds are high-risk investments as they depend on a specific idea or theme that may or may not yield high returns.

Frequently asked questions