Thematic funds — not everyone’s choice

Yoganand D | Updated on January 17, 2018

VIJAY KUPPA, Co-founder, ORO Wealth

P MAHESHWARAN, Chennai-based investor

SHOBHIT SRIVASTAVA, Software Developer



There are investors who stick to the safe path. There are also those who explore riskier options. Here’s a look at thematic funds and who favour them

Which mutual funds do you favour? If you were to ask investors this, likely they’ll come up with names such as HDFC Equity, UTI Equity, ICICI Pru Multicap, Franklin India Prima Plus or SBI Bluechip. But then, not everybody may opt for these.

There are investors who move away from tried and tested territory and explore niche spaces to diversify their portfolio. These investors might pick funds such as DSP BlackRock T.I.G.E.R, Canara Robeco F.O.R.C.E, Birla Sun Life Dividend Yield, UTI-Dividend Yield, UTI-MNC, SBI PSU, DSP BR Natural Resources & New Energy, Tata Ethical or SBI Contra fund.

These funds also have the objective of long-term wealth creation, but with a more focused approach. Funds that invest in specific themes or sectors fall in this category.

Thematic vs sector funds

Thematic funds invest in a particular theme, for instance, MNC funds park most of their money in stocks of multinational entities. The fund can invest across sectors as long as the company is part of a multi-national group. There are some thematic funds that invest based on a theme that is expected to do well over the coming years.

For instance, Birla Sun Life India Reforms fund, launched in 2010, invests in stocks such as YES Bank, Eicher Motors, HDFC Bank and Repco Home Finance, which are its current top five holdings. These stocks are expected to benefit through theCentre’s reform push.

Besides themes, a thematic fund can also be based on the style of investing, for instance, dividend yield funds invest predominantly in high dividend yield stocks such as Power Grid Corporation, HDFC Bank, Infosys, Hindustan Unilever and Coal India.

Thematic funds that invest in a sector carry higher risk as all the money is concentrated in a particular sector.

If the fortunes of the sector turn, these funds could see large gains. For instance, technology funds did well in 2009 and 2013, taking cues from the global environment; ICICI Prudential Technology fund delivered 123 per cent and 62 per cent returns respectively in these years. Strong growth on the back of a weak rupee then, improving US and Europe markets and more deal wins, boosted IT companies’ earnings during that period.

Infrastructure funds, however, have been under-performing over the past one year. IDFC Infrastructure, LIC MF Infrastructure, HDFC Infrastructure and HSBC Infrastructure Equity have delivered negative returns in the range of 4.8-9.6 per cent over the last one year.

Funds based on this theme invest in a wide range of sectors such as construction, energy, metals and engineering that benefit from the growth in Indian infrastructure and related activities. On the other hand, if an investor had invested in pharma sector funds such as SBI Pharma, Reliance Pharma and UTI Pharma & Healthcare funds three years ago, he/she would be sitting on a category average return of 26 per cent. Over the past one year, though, pharma sector funds are under-performing bellwether indices Nifty and Sensex.

Vijay Kuppa, co-founder, ORO Wealth, a Mumbai-based mutual fund advisory firm, says, “Thematic funds are high beta entities and carry non-diversified risk because most of the stocks are linked with a common theme. Hence, if the call is right, they can give you very high returns in a short period of time and vice versa.”

The route to investing

Shobhit Srivastava, a software developer by profession, who started investing in mutual funds a year ago through systematic investment plan, says, “ I opted for SIP (systematic investment plan) as it is hassle-free and probably the smartest way to invest in mutual funds, be it any market phase.”

Another investor P Maheshwaran, who has been investing in mutual funds since 2010, says he is convinced that “the risk is significantly reduced when investing in mutual funds rather than directly in equity markets.” He predominantly invests through SIPs. A small portion of his investment is also routed through lumpsum.

“I prefer to invest in banking sector funds now,” says Maheshwaran. “At present there is more liquidity in the market and private banks have given better results than public sector banks. NPA issues are in the process of being cleaned up and fresh capital is being infused into banking. The banking sector is beginning to look up,” he avers.

Expert’s take

Kuppa believes that investing in thematic funds through the SIP route is not a good idea.

“Thematic funds fall into the category of active mutual investment, they are not a product where one can begin a SIP and forget it. It should be used more tactically,” he cautions.

“Thematic funds are meant for a knowledgeable investor who has an idea about a theme. They are not meant for a person who does not know about the markets. From an advisor’s perspective, they should only be offered to those clients who understand the risk and who have the appetite for it.”

He also thinks that retail investors should be very careful of this kind of investing. If they are capable or have qualified advisers, then it’s fine. If not, it is better to stay away.

In Kuppa’s view, thematic funds do have their place in the mutual fund world. It is just that they are riskier assets (with higher return potential) to play with. They do not suit all but there is an audience for them.

Maheshwaran, who has learnt all about mutual funds from his advisor, says that thematic funds are riskier than diversified equity funds, but less risky compared to sectoral funds since, in thematic funds, the investments are broader in focus.

Published on August 21, 2016

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