Thematic investing is an alternative approach that chooses investments according to a particular issue or sector. Thematic funds are commonly known as sectoral funds, where investment is done in a particular industry of the economy. Some of these industries are real estate, agriculture, FMCG, power and energy, pharmaceuticals, infrastructure, banking, technology, financial services, metal, etc. If an investor thinks that a particular industry will be growing in the near future, he can make his investments in the mutual fund of that particular sector instead of investing in different equity shares of that sector. Such thematic portfolios are very volatile in nature and the gains and losses depend on how in or out of favour the sector is.
Why invest in a sector fund?
Thematic funds can be used to hedge against the other equity portfolio when an investors thinks that a particular sector will outperform the whole market. Instead of investing only in the shares of one company of a particular sector, an investor can be exposed to the entire sector through thematic funds. Sector funds are good for a short to medium term investment especially when the broader markets look weak. An investor can avoid company specific risk by investing in a sector fund as the risk will be diversified in different companies of the same sector.
Why should one stay away from a sector fund?
Thematic funds tend to be risky as they are less diversified compared to diversified mutual funds which invest in the broad market. Any industry which is performing well now, not necessarily will be outperforming in the future. Thus, more often the investors are not aware about when to get out before the dynamics of the sector changes. Returns on thematic funds even out over the long term when compared with diversified funds of the market.
Thus, sector funds are more or less for informed investor who gets in and out at the right time and not for a layman investor. These funds should be treated as an add-on to an already diversified portfolio to increases the overall return of the portfolio. Sector funds are for those investors whose risk taking capacity is high and who already has a large enough portfolio which can withstand a dramatic fall in the sector. Normally, one should not have an exposure of more than 10-15% of thematic funds to his total entire mutual fund portfolio.
However, the decision to invest in a sector fund depends a lot on the goals of the investor, and the extent of volatility he/ she is willing to take. More conservative investors should most likely be happy investing with diversified mutual funds, and thus less of a risk. Investors who are looking for a higher return in less time may consider the risk worth the effort, especially if there is convincing evidence that the particular industry will soon enter a period of great prosperity.
Finally, let's have a look over the returns of these funds -