Mutual Funds

Fund query: Are thematic mutual funds a good fit for you?

Aarati Krishnan | Updated on January 09, 2021

I invested ₹2 lakh in HDFC Housing Opportunities Fund during its launch in January 2018. The fund has performed poorly till date. Now, it is being converted into an open-end fund from January 19, 2021. Existing investors can either stay or move out by exiting by this date. Can you kindly advise the best course of action in this regard? I am a 70-year-old retired senior citizen.

RK Gaur

It would be best to redeem your investments in the fund. If you do not specifically opt for exit, your investments in it will continue by default as it converts into an open-end fund. We have three reasons for our recommendations.

One, while this may be a good time to bet on the housing theme, a thematic fund like this one is not well-suited to a person with a conservative risk profile like yourself. Today, low home loan rates, government incentives and concessions from States like Maharashtra suggest a possible revival in India’s residential housing market, which has been saddled with excess inventory for the last five years.

But then, a revival looked very possible even three years ago when this scheme was launched, and it didn’t play out as expected. This only goes to show that investors need a high risk appetite and the ability to track markets closely to make money out of thematic funds that play on a narrow set of sectors.

If the bet backfires, it is essential to exit quickly; if it works, one needs to be timely with booking profits before the theme peters out. Thematic funds are, therefore, only suits investors with a higher-than-normal risk appetite even within equity investments.

Two, if you believe you have the appetite for equity risks (that is, the possibility of capital losses) at this stage, a diversified equity fund or a broader market index fund like a Nifty 500 fund may prove a better fit for your requirements. With such funds, you can not just use SIPs to average your investment but also follow a buy-and-hold approach.

A fund manager of a good diversified fund will raise her allocations to housing-related stocks if he perceives a revival taking shape. But if the revival fizzles out, she will also have the flexibility to switch to other promising sectors, which a thematic fund often cannot do.

Three, when a fund trades below your investment price, the temptation can be strong not to sell it and to simply wait until the NAV comes back to par value or your buy price. But do note that to recoup your investment, you need not stay in the same fund — other equity products can do the job equally well.

For the future, do avoid lump-sum investments in any close-end fund. Avoid thematic funds no matter how attractive the pitch is about the investment theme or idea.

I have booked 60 per cent profits on my portfolio, as the market is at a peak and I have no necessity for funds at present. l am a senior citizen aged 70 years. I see that you usually suggest post office schemes, etc, for senior citizens and not debt funds. Please suggest me suitable debt funds for parking the money. I also request your opinion regarding liquid fund options in the PhonePe app.

M Bheemasankaram

It is wise of you to have booked profits on your equity funds given the elevated risks in the market at this juncture and your age profile.

Where you park the money should ideally depend on your needs. If you need regular income from the proceeds, we do believe that post office schemes like Senior Citizen Savings Scheme (SCSS) or GOI Floating Rate Bonds offer the best risk-reward at this juncture. We tend to suggest these schemes today because with interest rates at 7.4 per cent and 7.15 per cent, respectively, they are likely to deliver better returns than debt funds, with far greater safety.

While returns on debt funds may look quite attractive over the past one, three or five years, a lot of those returns have come from bond price appreciation on the back of the sharp fall in interest rates, which may not be sustainable. The returns in the next one year or three years may be far lower than these historical returns.

If you’re still inclined to go in for debt funds because of their tax advantage and anytime liquidity, we suggest floating-rate funds such as Aditya Birla Floating Rate Fund, Axis Treasury Advantage and IDFC Bond Fund - Short Term Plan.

Send your queries to

Published on January 09, 2021

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

This article is closed for comments.
Please Email the Editor