Thematic Funds– Contrary to the popular perception that thematic funds invest only in sector specific stocks like IT, Pharma, banking etc., in reality thematic funds are growth oriented equity schemes which invest in a set of stocks/companies that are positioned to benefit from particular trends such as government policies or technological changes that are expected to have a significant influence on business/economy over the long term.

There are many thematic funds like Banking & Financial Services funds, Information Technology, FMCG, Pharma, MNC, and Media & Entertainment focused funds. The performance of these funds is closely linked to the overall industry (theme), trend or implementation of government policy.

Thematic funds provide a strategic exposure to investor’s portfolio. If you pick the right sector, you stand to have higher gains than you would by investing in diversified fund.

A diversified equity fund will not be able to make the most of the upswing in a particular sector even if it provides some exposure to that sector. Thus once you have a core portfolio in place, it can be a good idea to have exposure to theme based funds. The additional exposure can provide a boost to the overall portfolio returns.

Current Market Scenario

Technology and Pharma stocks are available far below their historic valuations making it attractive to invest in IT and pharma oriented funds.This is a category of funds where it is extremely important to time your entry and exist. Investors should use the services of a good financial advisor to identify both the right time and the right fund.

Thematic Funds vs. Direct Stock Investing

With thematic funds, investors have the opportunity to bet on a particular sector instead of investing in a single stock from that sector.Typically a thematic mutual fund will consist of 10-12 well researched stocks from a particular sector or on a particular theme.

Concentrated Portfolio Composition – High Risk | High Return

Unlike diversified funds, thematic funds concentrate on only one theme / sector. Thus, portfolio concentration makes them a very high risk-high return investment proposition in comparison with diversified equity funds which invest across sectors and various market capitalizations.

Select Thematic Fund Performance (based on CRISIL rankings)– as on 24 May 2017

1 Year 2 Year 3 Year 5 Year
L&T Infrastructure 46.7 18.3 23.6 22.5
IDFC Infrastructure 53.4 17.7 20.5 15.1
Franklin Build India Fund 32.8 13.9 28.4 28.7
Category Average 35.7 13.1 18.2 15.4
UTI Pharma & Health -3.1 -5.2 12.7 16.2
Reliance Pharma Fund -3.5 -1.6 14.4 17.9
SBI Pharma Fund -6.9 -3.4 17.8 21.5
Category Average -4.5 -2.6 11.2 13.9
Kotak PSU Bank ETF 60.9 2.6 3.3 8.9
ICICI Pru Banking & Financial Services 54.3 22.6 25.4 28.2
Reliance Banking Fund 45.2 16.5 20.2 22.8
Category Average 39.9 12.4 11.5 9.8
SBI FMCG Fund 23.5 14.1 17.4
ICICI Pru FMCG Fund 19.3 10.1 15.7 16.6
Category Average 21.4 12.1 16.6 8.3
Franklin India TF 1.4 3.2 9.7 14.4
ICICI Pru Technology -2.2 1.1 10.8 17.8
Birla SL New Millennium -2.4 3.3 10.7 15.8
Category Average -4.3 1.1 8.1 10.3

How to Invest In Thematic Funds?

[1] Take Limited Exposure – In thematic investing, investors should not go overboard.  As a rule always diversify your investment and limit your exposure to a particular sector. Thematic fund should be 10-15% of your total portfolio.

[2] Past Performance to Predict Future Performance– Too often investors base their decisions on the basis of past performance and invest in those sectors where the rally has already started.In thematic investing, it is important that you should invest only if you are convinced that either the sector’s prospects are improving/ or will improve in the near future or that on a risk-reward basis, prices have fallen much below their justifiable valuations.

[3] Invest a Lumpsum Amount– In traditional equity funds, it is advisable to invest through Systematic Investment Plans (SIP) route so that the investors can have the benefit of rupee cost averaging but in thematic funds, this approach will not work.The reason is simple – once the sector has picked momentum, then there is no point averaging your cost as it will reduce your overall returns.

[4] Know When to Exit–Thematic funds deliver different returns in different market phases. Given the risky nature of this fund, investors should be able to time their entry and exit from the fund. Investors should invest their money in that particular fund only till the time the sector’s fundamentals are strong.

Buy and hold strategy does not always work in thematic funds. If you look at the past 1 year’s performance of the funds above and then make a similar table for these funds 5 years back, you will notice that thematic funds have their regular cycles of under-performance/ out performance. To the point that often buying such funds at a time of under-performing cycle of a particular sector will earn you above average returns with a very high degree of certainty.