The Case For Thematic Funds

By Adhil Shetty | August 1, 2017

One of the several investment avenues available to investors, thematic funds align themselves around a particular theme and invest solely within that theme. Unlike sectoral funds, thematic funds are more to do with a particular theme and not a specific sector. For instance, an infrastructure thematic fund invests in construction, cement, steel and other stocks related to that theme. Compared to sectoral funds, thematic fund investments are broader, and hence more diversified.

Opinions on whether you should bite into such a pie are typically split, but here are a few salient features of such funds you can keep in mind before making a decision.

Cyclical Nature Of Thematic Funds

By their very nature, thematic funds tend to vastly outperform or underperform the conventional indices. When their underlying variables align, they are known to generate exceptional returns. On the other hand – if their sector of choice is experiencing a downturn, they vastly underperform, often for extended periods of time. In the latter case, even SIPs are fairly limited in their power to average out the overall investment.

Emphasis On Timing

Timing is of the essence when allocating your funds in the thematic direction. It is best advised to stay away from including such funds in your portfolio unless you are sufficiently informed about the short and long term potential of the space in question. Even so, it’s best to keep in mind that a diversified equity fund can also dip into sectors of the market during an upturn without perennially locking itself into such sectors.

Filling Voids In Your Portfolio

In cases where your core portfolio is missing out on a certain space in the market – be it due to the fund’s mandate or otherwise, it makes sense to fill such spaces by adding the relevant thematic fund to go with the rest of your funds.

Again, your timing of entry and exit is crucial, and you should examine whether you should stay invested in such funds for a far more limited time horizon than your other funds.

If you are a seasoned investor who wants to take a concentrated bet on a particular theme, thematic funds can have a play in your portfolio. For the everyday Mutual Fund investor, a basket of diversified equity funds is a safer bet. And if the case for a thematic fund ever arises, it is advisable to only channel a limited portion of your corpus to a fund of choice.

The writer is CEO, BankBazaar.com

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About Adhil Shetty

Adhil Shetty is the Founder and serves as the Chief Executive Officer of BankBazaar.com. Adhil has a Master’s degree in International Relations with a specialization in International Finance and Business from Columbia University in the City of New York, and a Bachelor’s degree in Engineering from the College of Engineering Guindy, Anna University. Adhil is an expert in Personal Finance (Car loan/Home loan and personal loan) and he majorly consults on investment and spends rationalization for the Indian loan borrowers. His guidance is number based with real time interest rate calculations and hence useful for consumer’s real time query.

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