In a hurry? Read this summary:
- Thematic mutual funds are a sub-category of equity mutual funds that invest a minimum of 80% of their assets in stocks of companies across sectors, based on a specific theme or trend such as AI or ESG compliance.
- They offer sector and market-cap-agnostic diversification and carry a moderate-to-high risk profile. However, they do allow one to capture long-term opportunities driven by factors such as shifts in consumer behaviour, technology, and regulatory policy.
- Thematic funds differ from sectoral funds as they spread their investments across multiple sectors linked to a broad trend, whereas sectoral funds concentrate on a single industry, regardless of themes. They usually have higher volatility levels associated with them and require specialised sector knowledge.
Wealth creation demands more than a close eye on market movements. It also requires foresight and an ability to identify long-term opportunities. While attempting to capitalise on the growth offered by said opportunities, however, one must also adhere to the core tenet of portfolio stability via diversification.
This is where thematic mutual funds step in. Here is how they work, their key features, and why one should consider investing in them.
Understanding the workings of thematic mutual funds
Thematic mutual funds are a sub-category of equity mutual funds and invest at least 80% of their assets in the stocks of companies across sectors, based on a common theme or trend. A few common examples of these themes may include artificial intelligence and technology, ESG compliance, and more.
Themes are usually pre-determined based on factors such as consumer behaviour, regulatory developments, and others, and based on the assumption that they may potentially generate enhanced returns in the future. Based on this, fund managers then identify specific industries and sectors likely to benefit from future developments or changes.
Why thematic funds deserve a place in your portfolio
Investing in thematic mutual funds allows one to do more than just offset concentrated risks. Strategic foresight makes them a compelling option, for those looking to actively bolster growth in their portfolios. Here are a few reasons why you should consider investing in them:
Access to high-growth opportunities
Investing in thematic funds allows investors to tap into industries poised for growth on the back of specific trends such as the use of artificial intelligence, ESG compliance, advancement in manufacturing processes, and so on.
Capitalising on these trends sets their portfolio up to potentially provide for market and inflation-beating returns.
Enhanced portfolio diversification
Despite being focused on specific themes, thematic funds also provide for increased diversification by being sector agnostic, helping offset concentrated risks.
Additionally, they also invest in stocks of companies with varied market capitalisations to leverage the growth potential offered by smaller stocks, but offset the potentially high volatility levels associated with them with the stability offered by mid-cap and large-cap stocks.
Investment discipline
Thematic funds are suited to those with a long-term investment horizon, ready to weather market cycles instead of timing the market. They help discourage one from making emotional or impulsive decisions and develop a disciplined, patient approach to investing.
Now, given their focused nature, thematic funds may appear to be largely similar to another closely related sub-category of equity mutual funds. Namely, sectoral funds. However, their strategy and scope are significantly different.
What sets thematic funds and sectoral funds apart
Understanding the distinctions between thematic and sectoral funds is important to ensure one’s investment portfolio remains aligned with their financial goals and risk profile.
Underlying assets
A thematic fund invests in equities across industries and sectors that align with a broader theme. Sectoral funds, as the name suggests, invest only in a specific sector.
Diversification and risk
Thematic funds are moderate-to-high-risk investment instruments, depending upon their underlying theme and assets and sensitivity to market fluctuations.
Sectoral funds have considerably higher levels of risk associated with them, with investments being concentrated in specific sectors.
Investor suitability
Thematic funds are suited to investors who understand broader trends such as ESG compliance or the use of artificial intelligence, across sectors.
Those, however, with specialised knowledge specific to a particular sector, and a higher risk appetite, may consider investing in sectoral funds. Read our mutual fund selection guide.
Considerations for investing in thematic mutual funds
Investing in thematic funds demands careful evaluation of several factors, to ensure one can build a resilient portfolio which provides them with consistent and potentially market-beating returns.
Market expertise
Thematic mutual funds are typically suited to investors with an in-depth knowledge of broader trends and technological advancements, along with regulatory developments and the market forces of demand and supply. A comprehensive outlook helps one assess whether a fund and its underlying theme aligns with their financial goals, risk profile, and investment horizon.
Risk Appetite
More aggressive investors may consider investing in thematic funds. They are susceptible to higher volatility levels, given they are still focused in nature, despite being diversified otherwise. Know your risk profile first.
Fund manager expertise and past performance
Look for fund houses that demonstrate a proven track record of providing consistent returns on thematic funds, as well as clearly outlines how it identifies themes and sectors to invest in. Additionally, it must define how often it reviews and rebalances the fund’s holdings. Bear in mind that past performance is not always necessarily an indicator of future returns.
Thematic funds are a unique medium to capitalise on emerging opportunities in capital markets. However, they require in-depth expertise, discipline, and a comprehensive understanding of the associated risks and alignment with your financial objectives.
To further explore thematic mutual funds, visit SC Invest on the SC mobile app to help you assess themes, fund houses, and find the right fit for your portfolio. For further insights into trending themes and broader market performance, consider visiting Market views on-the-go, our resource for monitoring capital markets across the globe.
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