Can Thematic Funds Beat Market Blues? Time for a reality check amidst all the noise

• In the last six months, 12 new funds have been launched in thematic schemes category with multinational companies (MNC) fund, dividend yield fund being and business cycle fund catching investor attention.
• Such funds are popular as investors are looking for value creation across the board, beyond benchmark indices.
• Such funds carry high risk and may not meet investor expectations of better returns in the long run, say experts.

Thematic funds have created a buzz among investors given inflows into sectoral/thematic funds jumped more than three times from ₹903 crore in January, 2023 to ₹3,856 crore in February, 2023.

In the last six months, 12 new funds have been launched in thematic schemes category with multinational companies (MNC) fund, dividend yield fund being and business cycle fund catching investors attention.

Such funds are popular because investors are looking for value creation options, across the board beyond benchmark indices.

The fact that Indian markets have bled deeply while underperforming global markets let investors look for sectors that are relevant in the current market situation.

However, such funds carry high risk and may not meet investors expectations of better returns in the long run.

“In recent months, performance of large and mid cap funds has not been optimal which can explain shifting investor interest towards alternate funds. We saw something similar a couple of years back when Indian investors invested heavily in international funds with an aim to get higher returns from indirectly investing in technology companies overseas. However, thematic funds are riskier in nature. So only a limited portion of portfolio allocation should be made in them,” said Pranav Haldea, MD at Prime Database Group.

Thematic funds are investment funds focused on specific themes or trends. They invest in companies with specific themes like investing only in multinational companies, high paying dividend companies and so on to capitalize on growth opportunities and maximize returns.

High risk thematic funds is a risky bet
Meanwhile, since the sectors like PSU Banks and infrastructure have performed better in the volatile market, investors have been looking to invest in these categories.

Also, the PSU Bank index emerged as the top sectoral winner in 2022, recording gains of nearly 73% – or about 16x the gains of the Nifty50 in 2022, as on December 15.

“Some of the funds in categories like PSU/infrastructure/ and banking have done well, which naturally attracts more money from investors. In addition, there have been significant new launches, which creates buzz in the market and investors are enticed to invest,” said Dikshit Mittal, fund manager and senior equity research analyst at LIC MF Asset Management.

Mittal also highlighted that the domestic banking sector is also in good shape as they have clean balance sheets, the growth runway is large, and valuations are reasonable.

Infrastructure as a theme also seems to have a bright outlook considering government focus, budgetary allocations and resurgence of the manufacturing sector in India, says Mittal.

Not to forget, thematic funds carry high risk so experts recommend investors to allocate only a part of their corpus to such funds.

“In addition, thematic funds need timing to enter and exit so investors need to be agile in exiting these funds when their objective has been achieved,” said Mittal.

Timing and theme of the fund is an important factor that derives the performance of the fund as if the theme goes wrong, investor returns will be hugely impacted.

“The sudden popularity of thematic funds is largely driven by clients looking to invest in different pockets in the market. In this category, timings and wider themes are a challenging aspect to beat. Most of the existing funds have a narrow theme which ends up impacting their returns. We do not recommend thematic funds as it is not suitable for every investor,” said Kaustubh Belapurkar, director of fund research at Morningstar Investment Adviser India.

As thematic funds revolve around a certain theme, they are much less diversified than other large cap equity funds that have a mix of large and mid cap stocks. Experts feel lack of diversification and high risk in thematic funds makes it not suitable for all kinds of investors.

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