Mutual funds: What makes thematic funds gain in popularity among investors

Thematic funds have been drawing more inflows in recent months. In FY24, about 37 new fund offers were unveiled from thematic or sectoral categories, which together mobilised ₹25,493 crore.

This jump in popularity is driven on the back of several factors, including shifts in market dynamics and the unique advantages such funds offer.

Gaining in favour

In the past two years, thematic funds have been in favour among investors, especially first-time millennial investors, as asset management companies (AMCs) or fund houses get innovative in the mutual fund landscape.

The thematic category has drawn the attention of investors due to its ability to provide exposure to growth sectors and themes that are often underrepresented in major benchmark indices.

The current trend

In FY24, thematic funds witnessed substantial interest from retail investors, driven by a significant rally in the broader markets.

The relative outperformance of these broader markets, compared to benchmark indices, is largely a result of sector allocation and concentration in a few sectors within the leading indices.

The surge in themes such as defence, railways, infrastructure, green energy, and public sector enterprises (PSEs) has driven investors towards funds targeting these emerging sectors in the country’s equity market.

Sectoral versus thematic funds

Sector funds focus primarily on domains such as banking, pharmaceutical, information technology (IT), fast-moving consumer goods (FMCGs), etc, and invest in stocks in one specific sector.

On the other hand, thematic funds focus on particular themes and invest in stocks in sectors that are linked to the theme. Unlike sector funds that focus on one specific industry alone, thematic funds eye businesses commonly interlinked depending on a central theme.

A note to investors

As an investor keen on investing in thematic funds, one must initially get their core portfolios in place while building on their mainstream investment objectives. Thematic funds could be suitable for building as an add-on to the core portfolio.

The core thought is to start small while considering the themes that one is more accustomed to or likely to be aware of. It is only then that an investor should start building up the rest of the portfolio. However, this shouldn’t be initiated at the cost of core objectives or investments.

Also, thematic funds fall in the high-risk category, investors should ensure to allocate a part of their corpus to such funds.

There is a possibility of the theme going wrong perhaps and as a result, impacting the investor returns negatively.

It is important to be well-versed in the timing and theme of the fund, too. This is an essential factor that derives the performance of the fund.