Thematic Mutual Funds have gained immense popularity among investors seeking to capitalise on specific market trends. These funds focus on particular themes such as infrastructure, service sector, public sector undertaking, multinational companies, and so on. Understanding the dynamics and potential of Thematic Mutual Funds can help you gain from emerging trends and innovations.
Thematic funds more broad in scope sectoral funds, which invest in specific sectors such as pharma, IT, FMCG, automobile, banking and finance, etc. But often the two terms are used interchangeably.
Understanding Thematic Mutual Funds
Thematic Mutual Funds allocate at least 80% of their in stocks and securities in a specific theme. Unlike traditional funds that diversify across industries, these funds concentrate on a particular area of the economy, aiming to benefit from the growth and development within that sector.
How do Thematic Mutual Funds work?
1. Identifying the theme
The fund finds a specific theme or trend believed to offer long-term growth potential. The fund managers conduct thorough research to understand the potential of the theme, including market size, growth prospects and key drivers.
2. Selection of stock
The fund establishes criteria to identify companies. These companies are screened and filtered based on their alignment with the theme, as well as their financial health, growth potential and market position.
3. Building a portfolio
The fund constructs a diversified portfolio of stocks that fit the thematic criteria. This diversification helps manage risk by spreading investments across multiple companies.
4. Active management
Fund managers continuously monitor the performance of the investments and the evolution of the theme they selected. They may adjust the portfolio as needed to respond to the theme's dynamics.
5. Evaluating performance
Thematic Mutual Funds typically benchmark their performance against relevant indices or peer groups to evaluate success. Regular reports will be provided to you detailing the fund's performance, holdings and adherence to the thematic strategy.
6. Risks and considerations
The success of the fund is tied to the performance of the theme, which may be influenced by market conditions, regulatory changes and other external factors. Thematic funds may experience higher volatility due to the specific focus and the evolving nature of the themes they target.
Benefits of investing in Thematic Mutual Funds
1. Portfolio diversification
While Thematic Mutual Funds are based on specific sectors, they still add an element of diversification to your investment portfolio. By including these funds, you can spread your risk across different themes and reduce the impact of poor performance in other sectors.
2. Potential for long-term wealth creation
You can get benefit from the rise in value of companies within the chosen theme, potentially yielding higher returns compared to traditional diversified funds. Additionally, Thematic Mutual Funds are able to capitalise on rapidly evolving market trends and innovations. By investing in companies following these trends, these funds aim to capture the growth potential associated with emerging industries and technologies.
3. Suitable for well-informed investors
Thematic Funds are ideal for you if you are well-informed and understand the specific sectors and themes in which you are investing. You can make better decisions and leverage your knowledge to maximise returns from thematic investments.
Risks associated with thematic funds
1. Price risk
Thematic funds tend to be volatile because they depend on economic factors, market trends and industry-specific developments. This can lead to fluctuations in the fund's value, impacting returns directly.
2. Liquidity risk
Certain sectors or themes might have limited trading volumes. Difficulty in buying or selling fund holdings can affect the fund's performance and investor returns.
3. Event risk
Thematic Funds are vulnerable to certain event risks, such as technological disruptions, regulatory changes or geopolitical events that can impact the selected theme. These events can cause significant volatility and affect the fund's performance.
Taxability of Thematic Funds
Since these are equity funds, the same tax as equity funds apply to Thematic Funds. If you redeem it within a year from the date of purchase, you will have to pay a tax of 15% for short-term capital gains (STCG). However, if you stay vested in the fund for more than a year, you will have to pay long-term capital gains (LTCG) of 10%.
Factors to consider before investing in Thematic Funds
• Investment goals
You should invest in Thematic Mutual Funds in such a way that it aligns with your overall investment goals. Understanding how a Thematic Fund fits into long-term objectives and risk tolerance is important for wise investment decisions.
• Risk tolerance
Assessing your risk tolerance is crucial before investing in Thematic Funds. You should be well aware of the higher volatility and potential risks associated with these funds, and ensure you are comfortable with the level of risk involved.
• Research
Conducting thorough research on the selected theme and the companies within the fund's portfolio is pivotal. You should evaluate the current market trends, growth potential and risk capacity of the theme.
Also Read: Decoding the taxation of Mutual Funds
Conclusion
Thematic Mutual Funds invest in companies that work with specific themes. Fund managers actively select and adjust portfolios based on extensive research, aiming for long-term growth. While these funds carry higher risks, they capitalise on the trends and garner good returns.
Axis Bank’s comprehensive Thematic Mutual Fund services are designed to streamline your investment journey. With the bank's various Thematic Mutual Fund schemes in offer, seize the opportunities in India's booming sectors, such as innovation, pharma and technology, to appreciate your capital efficiently.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
Mutual Fund investments are subject to market risk, read all scheme related documents carefully. Axis Bank Ltd is acting as an AMFI registered MF Distributor (ARN code: ARN-0019). Purchase of Mutual Funds by Axis Bank’s customer is purely voluntary and not linked to availment of any other facility from the Bank. T&C apply.
