What are thematic funds? Everything You Need To Know

When it comes to making investments, there are numerous strategies and approaches to take into account. Thematic investing has gained popularity in recent years as a strategy. Thematic funds are mutual fund schemes that are operated based on a predetermined investment theme. This blog will explain mutual funds, their functionality, advantages, suitable investors, and important considerations prior to investment. So, which option is more advantageous for you, taxes or thematic funds?

 How Do Thematic Funds Work?

All mutual funds possess a fundamental asset that generates profits on their behalf. Large-cap funds consist of the stocks of some of India's largest companies based on their market capitalization. In the same vein, thematic funds consist of company stocks with a common theme as their underlying assets.

For example, if a fund adheres to an ESG focus, it will choose to invest in companies across various sectors that have performed positively in terms of environmental, social, and governance factors (ranging from technology to financial services to FMCG to Consumer Durables).

Thematic funds differ from traditional investment methods like market capitalization, style, and sectoral approaches. It allocates funds to a variety of sectors and market capitalizations as long as they are related to the overarching theme. Additionally, SEBI stipulates that at least 80% of total assets must be invested in equity and equity-related instruments of a specific theme.

Advantages of Investing in Thematic Funds

Thematic funds offer many advantages for investors looking to align their portfolios with specific sectors or sectors.

Potential For Higher Returns: Thematic funds have the potential to deliver significant returns, especially when the chosen theme is experiencing strong growth. By focusing on specific sectors, these funds can outperform broader market indices.

Focused Exposure: Thematic funds offer investors a specific theme or trend. This allows investors to align their portfolios with companies or sectors that are expected to achieve significant future growth. For those interested in a specific topic, thematic funds offer a valuable investment opportunity.

Alignment With Investor Beliefs: Thematic funds allow investors to customise their portfolio to align with their beliefs and vision - supporting causes they believe in, such as sustainable investing, technological advancements or demographic change.

Active Management: Thematic funds are managed in an active manner, enabling fund managers to adjust to evolving market situations and take advantage of opportunities related to their selected theme. This active strategy is designed to boost returns in comparison to passive investment strategies.

Who Should Invest in Thematic Funds?

Thematic funds are ideal for investors looking for specific long-term trends or market-forming themes. People who have a keen interest in thematic developments and are willing to take moderate to high levels of risk may find thematic funds an exciting way to realize their income potential. However, individuals should conduct thorough research and balance their thematic preferences with their investment horizon and risk tolerance before considering these funds.


Q. What are thematic mutual funds?

A. Thematic funds are a type of equity fund, investing in stocks of companies that are focused on a specific theme. These funds aim to capitalize on emerging opportunities by investing in sectors aligned with themes like manufacturing, innovation, real estate, transportation, and pharma.

Q. Are thematic funds risky?

A. Thematic funds come with both higher risks and rewards compared to more diversified funds like large-cap or multi-cap funds. Thematic funds focus on specific themes like PSU and Infrastructure, offering higher risks and rewards. They are more diversified than sectoral funds but carry concentration risk.

Q. What is the difference between focused funds and thematic funds?

A. Focused funds carefully allocate holdings, while thematic funds invest in specific themes. ETMarkets analysis reveals top performers in each category, with thematic funds outperforming in average 1-year returns.

Q. What are the 4 P's of mutual funds?

A. One such guiding framework is the 4 Ps—People, Philosophy, Process, and Predictability serving as a comprehensive guide in this regard. Let's delve into each of these aspects to help your investors make informed decisions: People: The individuals behind a fund house play a pivotal role in shaping its performance.

Also Read: BSE vs NSE: Which is the Best Option for Beginners?

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