What are thematic funds? How do they work? – An all-inclusive, comprehensive guide
Investing, we usually dwell on returns and risk however the attitude of investors is in transition. Consumers desire to make investments in organisations that are of their values. In case you are concerned about the environment, you would not invest in meaning that you would spend the money in companies that are polluting the environment, but in those that support clean energy, protection and social responsibility.
The change gave rise to thematic investing, which is a means of capturing key growth trends in the economy that can transform the entire economy. The investor has a clear direction because of the themes like Digital India, electric vehicles, clean energy, ESG, and increasing consumption.
⭐ What are thematic funds?
Thematic funds are mutual funds that are invested in companies related to one theme or thought. The companies do not have to be in the same line of business; they have the same idea.
For example:
ESG Theme: firms with good environmental, social, governance practises.
Theme of Clean Energy: solar, wind, battery storage, EV support.
Digital India Theme: IT, internet services, digital payments.
PSU Themes: government-owned companies.
Consumption Theme: FMCG, retail, auto — companies that people purchase the products of.
The thematic funds focus on investing in the key mega-trends, which stand a high chance of increasing at a high rate in the future
⭐ How do thematic funds work?
Thematic funds have a targeted approach: the whole portfolio takes a single theme.
Theme Selection
The fund house selects a theme that is likely to increase in the next few years, due to change in the economy, development in technology or social transformation.
Identifying Companies
Businesses that have a connexion with the theme are close to managers even though they cut across numerous fields.
Fundamental Research
The financial soundness of every company, its leadership, business model and its future are well evaluated.
Portfolio Construction
The most powerful companies that can be added to the theme are included.
Continuous Review
When a company performs poorly or the trend involves an adjustment of the holdings by the managers.
The returns of the fund monitor the performance of the theme in the market.
⭐ Advantages of Thematic Funds
Compared to the conventional approach, thematic investing has a number of advantages.
1. Potential to Seize Future Growth
An investor in an area of electric vehicles or renewable energy has a good opportunity to make money as a certain theme tends to grow the most in a short period of time.
2. Benefit of Diversification
Despite the single theme, the fund contains the companies of numerous industries, which offers some diversification.
3. Investing in Line with Personal Values and Opinions
ESG themes are naturally attracted to investors who have a concern about social responsibility, the environment or good governance.
4. The long-term returns could be improved
By ensuring that the selected theme gets stronger as the time passes, the fund will be able to beat the market.
⭐ Risks of Thematic Funds
Any investment is risky and thematic funds have certain issues.
Concentration Risk (Reliance on one Theme)
The whole portfolio is reliant on a single theme and hence a poor theme can be detrimental to the fund.
High Volatility
High concentration in few firms causes NAV swing to be more responsive to the market
Liquidity Risk
Most of the themes include small or mid-cap companies that are less frequently traded, thereby complicating redemptions.
Trend Reversal Risk
A theme can be successful years later only to wilt very fast, negatively affecting performance.
⭐ Who is to make the investment and who not?
Suitable Investors:
High-risk appetite
Long-term horizon (5–7 years and above)
Good understanding of the topic or company
Eagerness to exploit high-growth markets
Not Suitable:
New investors
Very low risk tolerance
Short-term investment goals
⭐ Summary
Thematic funds are attractive particularly when one wants to get opportunities of future mega-trends. They provide access to high-growing sectors of the economy, though it is important to keep in mind that they are more risky, since the whole portfolio will only be dedicated to a single theme.
Prior to an investment, do the following:
Understand the theme
Evaluate the risk
Keep a long-term perspective
Profile, read the fund documentation, and risk profile
⭐ FAQ – Frequently Asked Questions
Are thematic funds safe?
No, they are more risky since they specialise in one theme.
Thematic versus sectorial funds
Thematic and sectorial funds differ in several ways.
Thematic funds typically invest in multiple industries that share a common theme; sectoral funds only invest in a single industry.
Is thematic funds a good long-term choice?
Yes, at least 5–7 years (or more) horizon.
Is ESG a thematic fund?
Yes,
ESG is a popular theme.
Do these funds yield high returns?
Yes, but that all depends on the performance of the selected theme in future
