Theme based investment sounds lucrative, especially if you believe that
stocks
in a particular sector are expected to do well.
Thematic funds
are one way to consider theme based investment. Let’s understand this better:
As the name suggests, thematic funds are
investments
that focus on specific themes by allocating a significant portion of their assets to related stocks.
In recent years, fund houses have introduced various themes such as Public Sector Undertaking (PSU), Infrastructure, MNC, Business Cycle, and Manufacturing funds. For instance, a PSU fund includes stocks from entities like SBI, Coal India, and ONGC. On the other hand, an infrastructure fund targets companies involved in sectors like construction and cement, such as Larsen and Toubro, UltraTech Cement, and KNR Construction.
Thematic funds come with both higher risks and rewards compared to more
diversified funds
like large-cap or multi-cap funds. While thematic funds have a narrower focus, leading to higher concentration risk, they are still more diversified than sectoral funds like IT or pharma, thus carrying relatively lower risk, states an ET report.
Investing in these funds can result in significant returns when the economic environment favors the theme, but adverse economic conditions can lead to losses in the short term. Also, the themes may take a longer time to materialize, potentially underperforming the broader market.
Financial experts
recommend that novice investors start with diversified equity
mutual funds
before considering thematic funds. Thematic funds are suitable for investors seeking to enhance returns and are willing to understand and accept the associated risks. It is suggested to allocate thematic funds as a satellite portfolio alongside a core portfolio consisting of diversified equity mutual fund schemes.
Investors can choose to invest in thematic funds through lump sum or systematic investments. A staggered approach may be beneficial if investors anticipate favorable events unfolding over time, while a lump sum investment is suitable if they believe the theme can perform well at any time.