Wealth Creation Through Thematic Funds

Among the many options available for investors from the mutual funds space, thematic schemes are prominent choices that need greater consideration.

Typically, a theme comprises a set of several sectors. Over the past few years, funds tracking several themes have been rolled out. Manufacturing, consumption, infrastructure, multinational companies (MNC), energy, public sector undertakings (PSUs), defence, services, transport & logistics are some of the themes that are tracked, with dedicated indices as well.

Several themes have clicked well in the post-COVID broader market rally.

Wide Scope, Robust Performance

Market regulator SEBI (Securities and Exchange Board of India) has mandated thematic funds to invest 80% of their portfolios in stocks related to their underlying themes.

As means to long-term wealth creation, thematic funds may hold great potential over the medium to long term.

Diversification via multiple sectors: Thematic funds usually have several sectors that are part of the underlying theme. For example, transportation & logistics as theme will have segments such as automobiles, auto components, courier & logistics companies, airlines, port operators etc.

Thus, it is possible to build a robust diversified portfolio by investing in multiple sectors within a theme.

Multi-cap approach: With multiple sectors within a theme, the other advantage that a thematic fund has is also housing stocks from across market capitalization. Some segments have companies only from the small and midcap space, while others will be from the large-cap set.

So, a thematic fund doubles up as a sound multi-cap fund with stocks across market capitalization, enabling it to benefit from broader market rallies.

Outsized potential: When a theme is identified sufficiently early, there is potential for strong performance that beats standard market benchmarks. A fund manager in a thematic fund is allowed to take large exposure to individual stocks and sectors within a theme that is likely to do well. This larger position sizing in the portfolio gives scope for making most when a theme rallies strongly.

Lump-sums and SIPs work: Although an element of timing on entry and exit is involved in thematic funds, when there is a lump-sum surplus available for investment, a well-selected theme can be very rewarding. On the other hand, those with defined monthly cashflows can take the SIP route to investing in thematic funds if they feel the theme will play out over several years or is a structural long-term story.

Restrictions in diversified funds: While a regular diversified fund can also invest in performing themes, there are restrictions on market cap, sector and stock weightages etc. So, the ability to fully gain from a theme’s rally may be tough for a regular scheme, whereas a thematic fund faces no such impediments.

Thematic funds do come with volatility and performance could be lumpy at times. However, when investors enter a thematic at a suitable time with a lump-sum or take the SIP route, the potential for the resultant wealth creation can be substantial. A longer-term perspective becomes necessary for positive investment outcomes.

While the core portfolio must be invested in regular diversified funds, investors can use thematic schemes for diversification. They can allocate a smaller portion of their overall portfolio to such schemes which can add unique opportunities and growth potential, after consulting their investment adviser or distributor.