Thematic Funds - What Is It? Who Should Invest In It?

Thematic funds, as the name suggests, are mutual funds that invest in equities in a specific investment theme. The themes are mostly based on certain trends and investment stories. For example, if you are optimistic about consumption, you can go for a thematic fund on investment which will invest in FMCG and other sectors related to rising consumption by people. A thematic fund diversifies across sectors to follow its theme. If you are a person who likes to track macroeconomic trends, you will have a taste for thematic funds. Thematic funds are predominantly equity-based. The key thing to remember is that it carries the risks that are inherent in equity-linked mutual funds.

How Do Thematic Funds Work?

Thematic funds create an investment thesis around a sector. This can be in Environmental, Social, and Corporate Governance (ESG) factors, which means investing in firms with performance on these parameters. It can be a thematic fund that is based on real estate. It can be a theme based on steel. The money that you put into this mutual fund will be invested in equities at the portfolio manager’s discretion. Money can be invested through the SIP or lumpsum model and can be withdrawn at any time.

Who Should Invest in Thematic Funds?

Professionals who have a very definite taste for investments in the high-risk equity segment can invest in thematic funds. An investor can go for an investment theme about which they are upbeat through these mutual funds.

One of the reasons to invest in thematic funds is an investor gets to use the expertise of a reputed mutual fund rather than directly making investments in individual equity stocks, which can be comparatively riskier as an individual investor may not have the deep expertise or time to dedicatedly track the stocks. There are many benefits to investing through a mutual fund compared to putting all the available corpus directly in equity stocks.

What are the Benefits of Investing in Thematic Funds?

Thematic funds offer more diversification than sector-specific funds. This is because a thematic fund usually covers more than one sector. For example, a manufacturing-themed fund would invest in stocks across multiple sectors. So, if a sector is facing a downturn, the investment will shift to other industries.

Possibility of high returns: Investing in an equity-linked fund brings with it the possibility of higher returns. If a theme proves to be right, and the fund manages its investments well, an investor stands a chance to make a high return on their investment.

These are open-ended funds, so one can withdraw money as and when required. There is no lock-in period.

What is the Risk Profile of Thematic Funds?

Equity-related funds are always riskier than other types of funds. For instance, a well-performing fund may suddenly turn track, and stocks get beaten down very quickly. Thus, thematic funds come with these risks. The high volatility of equity-linked mutual funds makes them a high-risk, high-return investment play.

What is the Right Investment Strategy for Getting Into Thematic Funds?

Since this is a high-risk, high-return fund, an investor should set aside funds that he can afford to take a risk with. An investor should not invest funds meant for financial security and retirement in this kind of fund. An investor can look at it as a long-term equity investment and wait for returns to become substantial enough, and exit when the pricing is on the higher side.

What are the Investment Options in Thematic Funds?

There are plenty of thematic funds to choose from. You can pick a fund as per your examination of an investment story. For example, if you feel that manufacturing is going to pick up in a major way in the country, you can look at various manufacturing funds.

The following are the most common categories of thematic funds:

· ESG fund

· Consumption fund

· Energy fund

· MNC fund

· Manufacturing fund

· PSU fund

Fees and Charges of a Thematic Fund

Thematic funds usually attract an expense ratio of 2-2.3%. This is much higher than other types of mutual funds. Many other diversified mutual funds charge an expense ratio of 1.4-1.8%.

An investor should find out the expense ratio of the fund they are making an investment into, even though these are funds whose objective is to chase higher returns at the cost of higher expense and high risk. The cost is less if the mutual funds are bought through a direct fund plan. If an investor goes for a regular fund, a small commission is also paid to the advisor/intermediary.

Taxation of Income in Thematic Funds

Redeeming your funds in less than 12 months will involve paying short-term capital taxation. This means you pay 15% of the income as tax, plus surcharge and cess, irrespective of the tax slab to which you belong. If the funds are withdrawn after a year, the capital tax is reduced to 10%. There are some provisions in the income tax act which can be utilised, such as exemption of income of up to 1 lakh under long-term capital tax is waived in a financial year. This is can motivate youngsters to try out this fund.

How Can One Make an Investment in a Thematic Mutual Fund?

This can be done at the click of a few buttons. There is no need to go to any physical space. Go to Jupiter Money, and all that you need to make an investment is available, just register and swipe.

Key Takeaway

Thematic mutual funds offer a chance to make investments in equities through calculated and diversified risk. Investors who are following macroeconomic and market trends can invest in these mutual funds depending on their outlook for a particular segment.

They gain by getting the expertise of mutual fund companies that actively track the market and have experience in investing, and have proven their ability to generate returns.

There are times when some investment stories are doing well, such as PSU, manufacturing, MNC, energy, and consumption, and that is the time when investors look at thematic funds.

One must remember, though, any fund that is dedicated to equities is subject to volatility and risk. Most investors who go for thematic funds are those who can digest the volatility and wait for a long-term horizon to get returns.

Frequently Asked Questions

Is a thematic fund a low-risk investment option?

Not at all. For low-risk investments, one opts for mutual funds that are into debt instruments. Thematic funds invest money only in equities, and these are inherently a risky asset class.

What is the lock-in period for investments in thematic funds?

There is no lock-in period for investments in thematic funds. An investor can withdraw their funds on any business day.

How long should one invest in thematic funds?

Mutual funds dedicated to equities are based on long-term stories. In the long run, Indian companies grow, however, in the short run, they may face volatility and economic downturns. Thus, the mature investor in thematic funds gets into it for 5-7 years while keeping an eye on the investment regularly.

How about the tax benefits of investing in a high-risk asset category?

There are no taxation waivers in this category of investment. If you withdraw your money in less than a year, you are charged capital tax gains of 15%, and if you withdraw your funds are a year, this tax becomes 10%.