What are the Different Types of Thematic Funds?

Funds that invest in companies or stocks according to a specific theme are called thematic equity mutual funds.

According to the Securities and Exchange Board of India (SEBI), thematic funds are classified under the category of Sectoral/Thematic Funds. These funds are required to invest a minimum of 80% of their total assets in the respective sector or theme. The remaining 20% can be invested in other equity or debt instruments.

In contrast, diversified equity funds can invest in any sector or theme. There's a difference between thematic funds and sector funds, but they're often confused. There are a variety of different sectors that can be included in thematic funds. For example, consumption-oriented thematic funds invest in FMCG, Financial Services, Automobiles, etc.

Sector funds invest in only a particular industry. As an example, banking funds are sector funds since they invest only in banking stocks. Due to their diversified portfolios, thematic funds offer fund managers a variety of stocks to choose from. In this article, let’s examine the types of thematic funds.

Types of Thematic Fund
Dividend Yield funds, PSU equity funds, MNC funds, energy funds, consumption funds, ESG, Manufacturing, Quant, etc, are some of the different types of thematic funds. Let’s understand each one in detail:

1. Dividend Yield Funds
A dividend yield equity fund invests in dividend yield stocks and companies with higher dividend yields. Like all other funds, these funds declare a daily NAV. The dividend declared by underlying companies forms part of the fund's portfolio and resultantly impacts the NAV. As a result, more dividends from the underlying stocks in the portfolio will result in a higher increase in the NAV.

Approximately 80-90% of dividend yield funds' portfolios are invested in dividend yielding stocks. Choosing stocks is not solely based on dividend yield but also the financials, growth prospects, fundamentals, and sectors.

2. PSU Equity Funds
These funds invest in stocks of public sector units (PSUs) listed on the stock exchange. The PSU equity mutual funds invest in government-owned companies.

Some of these sectors include banking, oil & gas, telecom, metals, hospitality, aviation, etc.

3. Energy Funds
An energy fund invests in stocks of companies involved in the energy and natural resources sectors. Companies in the energy sector are involved in oil, gas, and metal production.In India, this is a huge sector. Being a large country, our energy sector-related requirements are high. Majority of the companies in this sector are large corporations or PSUs.

4. MNC Funds
MNC funds invest in the stocks of multinational companies (MNCs) listed on stock exchanges. These are open-ended equity funds that predominantly invest in foreign/multi national companies.

Many multinational companies have subsidiaries in India, including those from the United States, United Kingdom, Germany, Japan, South Korea, France, etc. The parent company operates from its country of origin, whereas the Indian business operates in India. They aim to generate income from selling their goods and services within India and exporting from India.

These MNC stocks follow the same rules and regulations as Indian companies.

Consumption Funds
Consumption funds invest in consumption-oriented sectors. The consumption-oriented sectors include automobiles, FMCG (Fast-moving Consumer Goods), consumer durables, telecom, financial services, etc. These funds invest in consumer-facing businesses that produce goods or provide services widely used by consumers.

These companies sell products and services that are purchased by millions of people.

5. ESG Fund
ESG Fund aims to generate long-term capital appreciation by investing in diversified portfolios of companies demonstrating sustainable practices across Environmental, Social, and Governance (ESG) parameters.

6. Manufacturing Fund
A manufacturing thematic fund is a type of mutual fund that focuses on investing in companies within the manufacturing sector.

7. Quant Fund
Quant Fund seeks to generate long-term capital appreciation by investing primarily in equity and equity-related instruments selected based on a quantitative model.

8. Other Thematic Funds
Additionally, there are some smaller themes such as commodities, exports, and transportation.

What Types of Investors Should Invest in Thematic Mutual Funds?
To invest sensibly, investors must understand the market and macroeconomic conditions in depth. Investors new to mutual funds should avoid these funds since they may not keep up with fluctuating markets and business cycles.

Thematic funds are preferred by long-term investors because they may generate capital gains over time. Also, thematic investments can be suitable for those with a higher appetite for risk since the investment universe is concentrated.

Benefits of Thematic Investing
Here are two significant advantages for thematic fund investors:

1. Diversification
Thematic funds offer diversification compared to sector funds. Portfolios with less diversification are more susceptible to market fluctuations in a single sector. Therefore, if your sector performs poorly, you may see a significant decline in capital gains.

By investing across a variety of sectors, thematic funds reduce this sensitivity. As equity instruments themselves are quite volatile, these funds aim to spread this volatility over a wide range of sectors and industries. Suppose one MNC's stock price goes down, but another's goes up, your losses may be balanced out.

2. Scope of Capital Appreciation
Although most investors do not follow an investment strategy and go with the flow, if they pick the right theme and enter at the right time, they can enhance their scope of capital gains. Moreover, sectors must be constantly monitored and analysed in terms of their positioning in particular markets.

Conclusion
In thematic funds, investments are made in industries and businesses associated with a certain concept or theme. Dividend yield funds, PSU funds, energy funds, MNC funds, consumption funds, manufacturing funds, quantitative funds, commodities funds, export funds, services funds, and transportation funds are some of the types of thematic funds. It's important to do your research before investing in funds. Also, learn about the industry or theme you're interested in and check out analyst reports. Lastly, consider your risk profile before investing in thematic funds.

FAQs on Types of Thematic Funds
How long does it take to stay invested in thematic funds?
Thematic funds are generally suitable for long-term investments. Investing in these funds requires patience due to their higher risk and volatility. Individuals might want to consider an investment time horizon of 5-7 years to offset any short-term losses that sectors might experience.

Can thematic funds be redeemed at any time?
On any business day, you can redeem both your principal amount and your capital gains. It is an open-ended fund with no lock-in period. This may allow you to easily convert your investment into cash when you need it.

Is the MNC fund a thematic fund?
Yes, an MNC fund is a type of thematic fund.

How do sectoral and thematic funds differ?
Sectoral funds invest only in companies within their sector. Thematic funds invest in companies from a variety of sectors that relate to the fund's theme. For example, an infrastructure thematic fund will invest in cement, steel, construction, and other sectors involved in infrastructure development.

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