How to invest in thematic fund

Investing in stocks has always been a popular choice among investors. However, there are numerous other investment opportunities available that can help diversify your portfolio and mitigate risks. These include individual stocks, exchange-traded funds (ETFs), and mutual funds. Mutual funds, in particular, are highly favored as they offer the chance to invest in a variety of securities and benefit from the expertise of an investment professional who manages the fund’s investments.

One type of mutual fund that has been gaining popularity is the thematic mutual fund. This article aims to provide an understanding of thematic investing and guide you on how to invest in thematic funds in India.

What are Thematic Funds?

The thematic fund functions like any other mutual fund for almost all practical purposes. By investing in this fund, you will receive a proportional portion of the earnings based on your investment amount. Different strategies guide individual mutual funds and approaches when building a portfolio. One of these strategies is thematic investment. Thematic investing allows investors to get involved in the market with specific ideas. For example, companies in sectors such as steel, cement or building materials will be targeted by a fund focused on infrastructure. The factor that distinguishes thematic mutual funds from other ones is the investment strategy they adopt.

Understanding Thematic Funds

A thematic fund operates much like any other mutual fund. When you invest in this fund, you receive a share of the earnings proportional to your investment amount. Each mutual fund follows a unique strategy and approach when building a portfolio. One such strategy is thematic investing, which allows investors to participate in the market based on specific ideas or themes. For instance, a fund focusing on infrastructure would target companies in sectors like steel, cement, or building materials. What sets thematic mutual funds apart from others is the distinctive investment strategy they employ.

How do Thematic Funds Work?

A thematic fund focuses on specific topics or trends, such as clean energy and technology. These funds invest in companies linked to a particular theme to generate growth opportunities and achieve returns for investors. Investment experts in a specific theme or trend manage thematic funds. These managers conduct research and choose companies likely to benefit from this theme and provide growth potential.

Several channels, such as mutual funds, ETFs and individual stocks, are available for investors when investing in thematic funds. The fund manager will manage the thematic fund's investments, deciding which companies to invest in and when they are bought or sold. The performance of the companies in the portfolio will determine the performance of the thematic fund. The value of the thematic fund may be increased if companies in the portfolio perform well and a particular theme or trend develops. On the other hand, the value of a thematic fund may be reduced if its portfolio companies are not performing well or themes and trends turn negative.

In general, thematic funds allow investors to participate in specific areas or trends and enable fund managers to make investment decisions on their behalf. Exposure to growth areas and potential returns may also provide investors with benefits regarding professional management and diversification.

Key Considerations and Benefits of Investing in Thematic Funds

If you’re considering investing in thematic funds, there are several factors you should take into account

1. Investment risks

Although the benefits of fund investments could be considered desirable, knowing the risk associated with such funds is also essential. It's a high-risk path

2. Expense Ratio

You must be transparent about the costs that eat away at your earnings. Asset management companies (AMC) charge you an expense ratio as a fee for managing the thematic funds you intend to invest in. This fee covers the fund's running and administrative expenditures, such as marketing charges and fund manager salaries. Annual costs are made for it.

3. Investment objectives

Investors must be aware of their investment objectives before investing in these funds. You must have an investment horizon of over five years if you will benefit from your investments in thematic funds. It's just a simple reason. It will take significant time for any sector to achieve its peak. Therefore, to invest in these funds, you must set long-term goals such as premature retirement, financial contributions for a child's education, etc.

Benefits of Investing in Thematic Funds

The advantages of investing in thematic funds are as follows.

1. Market-beating Returns If an investor selects a theme that resonates with them, thematic funds have the potential to deliver exceptional returns. However, it’s important to note that identifying the right theme is not as straightforward as it seems. It requires regular monitoring and tracking of news and headlines. But if you manage to identify a suitable theme, your hard work can pay off with good returns from thematic investing.

2. Diversification Investing in a Sector Fund does not offer diversification opportunities as your portfolio is limited to one sector. If that sector underperforms, it could negatively impact your portfolio. In contrast, thematic funds can provide diversification as they invest based on a theme that can encompass stocks of companies from various sectors.

Conclusion

Thematic funds are equity funds that invest in the stocks of companies aligned with a specific theme. The underlying assets can yield high returns if investors identify the right theme at the right time. However, it’s a risky investment. Not only can it be suitable for experienced investors with a high risk tolerance, but it can also be considered by individuals who carefully select diversified sectors based on an underlying theme.

FAQs on How to Invest in Thematic Funds

Who should invest in Thematic Funds?

For investors who are interested or believe in a particular theme or trend and wish to buy into companies expected to earn from it, thematic funds can be an excellent investment. Investors seeking potential growth opportunities over the long term, willing to accept a higher level of risk in exchange for greater returns, may find these funds particularly attractive.

How do you do thematic investing?

Determine and compare the various themes and sectors with other asset classes. When benchmarking a theme, it is essential that you also compare its risk volatility to the market. You can configure the portfolio according to your preferences and risk profile as soon as this is done.

Are thematic funds risky?

They invest in smallcap, midcap and big-cap companies within their sectors or themes. Sectoral and thematic funds are considered high-risk funds and ideal for investors willing to take higher risks because they focus on a specific sector or theme.

How are thematic funds taxed?

Thus, irrespective of your tax rate, you must pay 15% plus surcharge and cess. Therefore, the tax on your return will fall to 10% if you remain in the fund for 12 months or more.

Which category does thematic mutual fund fall under?’

Thematic investing funds are equity funds that invest in stocks linked to specific themes or ideas.

Market caps are defined as per SEBI regulations as below: a. Large Cap: 1st -100th company in terms of full market capitalization. b. Mid Cap: 101st -250th company in terms of full market capitalization. c. Small Cap: 251st company onwards in terms of full market capitalization.

Note: Views and opinions contained herein are for information purposes only and should not be construed as investment advice/ recommendation to any party or solicitation to buy, sale or hold any security or to adopt any investment strategy. It does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The recipient should exercise due caution and/ or seek professional advice before making any decision or entering into any financial obligation based on information, statement or opinion which is expressed herein.

Statutory Disclaimer: Axis Mutual Fund has been established as a Trust under the Indian Trusts Act, 1882, sponsored by Axis Bank Ltd. (liability restricted to Rs. 1 Lakh). Trustee: Axis Mutual Fund Trustee Ltd. Investment Manager: Axis Asset Management Co. Ltd. (the AMC). Risk Factors: Axis Bank Limited is not liable or responsible for any loss or shortfall resulting from the operation of the scheme. No representation or warranty is made as to the accuracy, completeness or fairness of the information and opinions contained herein. The AMC reserves the right to make modifications and alterations to this statement as may be required from time to time.

Past performance may or may not be sustained in future.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.