Thematic Funds: Should you bet on them?

Mutual fund offers a wide variety of funds to its investors, depending upon their risk, purpose and investment horizon. Post re-categorization circular that defined each category, Securities and Exchange Board of India (SEBI) has made it even simpler for the investors to identify and select funds from different categories.

Thematic is one such category. More often, thematic funds are muddled with sector funds. However, they are quite different from each other. According to SEBI’s re-categorization circular, thematic funds are those which have minimum 80% of its total assets invested in equity and equity-related instruments of a particular theme. There are various themes such as public sector undertaking (PSU), consumption, energy, multinational corporation (MNC), etc. These days, new themes have emerged, namely Environmental, Social and Governance (ESG).

The above graph shows that in one-year time frame, all the themes have given negative returns. PSU theme saw the deepest fall of 21 per cent returns. Besides, one-year is a short period to judge any equity fund.

However, the story changes completely when we take a look at the long-term perspective wherein, apart from PSU theme, all other themes ended positive in five-year period. Energy theme was the one which gained the most, followed by consumption theme.

Should you invest?

The choice of investing depends upon various factors. Your risk profile is one of the major determinants of whether or not to go for thematic funds. If you are a conservative to moderate risk-taker then, you should refrain yourself from investing in these funds. However, if you wish to invest in them, do not allocate more than 5 per cent to 10 per cent of your entire portfolio to these funds.

Nevertheless, moderately aggressive and aggressive risk-takers can very well invest in them and take this as an opportunity to earn that extra return on your portfolio. Besides, having a financial plan in place is crucial. If you are still on your way to fulfil your needs then, it would be better to stay away from these funds, irrespective of your risk profile. However, in case all your needs are taken care of and now your sole goal is to create wealth, then you can invest in them. Remember investment horizon also matters, so do not ignore it. If you are planning to invest in thematic funds then, minimum investment horizon should not be less than seven years.