We all have our some special likes and dislikes as humans. This is evident in our investment behaviour as well — and is seen in our investment strategy when we shortlist a particular asset class, a sector or theme of stocks. Those interested in environment might want to invest in funds that are committed to environment, an investor who works as physician might want to invest in healthcare sector, and a banker is likely to have a special corner in his heart for financial stocks.
The equity mutual funds that invest in stocks belonging to a particular sector or theme are broadly referred to as thematic funds such as those investing in infrastructure, energy, finance, agriculture and healthcare, among others.
Experts say that thematic funds are launched to woo investors when markets are trading at high level and investors are not in a position to make fresh investments.
And some themes tend to strike a chord with investors quickly, making them popular during an investment cycle but not for long.
This means most themes do not stay popular for a long time barring a few ones such as ‘consumption’. As per the Value Research data, infrastructure funds fetched an average annual return of 13.05 percent and consumption theme funds gave an average annual return of 17.02 percent over the past 10 years, whereas flexi cap funds fetched a return of 15.63 percent over the same period.
One of the key disadvantages of investing in thematic funds is that investors run high concentration risk.
In other words, investors place their bets only on one sector or a group of sectors. In case circumstances turn adverse, the losses can be substantial.
And even when the sector is on a downhill, fund manager can do little to change the portfolio mix since it is mandatory to invest 80 percent in the theme or sector to which the fund belongs. So, in comparison to the diversified funds, thematic funds are riskier because in the case of former, poorly performing sectors and industries can be exited any time unlike in thematic funds.
Because of the risk involved, they are not considered safe bets for novice investors.
The early investors tend to base their decisions on the past returns of the fund — a practice which may not work in thematic funds. For instance, healthcare sector was under pressure until the second half of 2019, but after the pandemic, it gained traction. But someone who would have invested in the third quarter of FY2021 would not rake in good returns.
“At the end of the day, investment is all about the right timing. If you entered the fund at the wrong time, then it is unfeasible to earn good returns — especially in the short or medium term,” says Deepak Aggarwal, a Delhi-based financial advisor and chartered accountant.
So, it is advisable to invest in thematic funds only if you have a long-term horizon. Those who are impatient or short-term investors can explore other more flexible fund options.