If you often get confused between thematic and sectoral funds, then here is a guide to help you understand the basic differences between both the funds and understand how beneficial they are as investment option.
There are some basic differences between the diversified equity mutual funds and sectoral and thematic funds. These are the funds that invest in selected stocks from a single sector or specific theme.
In a sectoral fund, the scheme invests 80% of its total assets in a particular sector like banking, technology, FMCG etc.
On the other hand, in thematic funds, the scheme invests a minimum of 80% of its assets based on a theme comprising of multiple sectors. For example, certain funds have invested in the consumption sector and energy-related sector.
However, before investing in these funds here are a few things you should know:
Risk Factor: the sectoral and thematic funds are known to carry a significant amount of risk which means investing more than 10% of your overall investment can be a huge risk. Thus investors must keep a diversified portfolio comprising of debt investments and other regular funds before proceeding with sectoral and thematic funds.
Type of investor: These funds are suitable for investors who have a moderate to high risk-bearing capacity. Also, investors are advised to have sound knowledge and a good understanding of these funds before proceeding with such investments.
Exit timings: The exit timings of these funds are important as this may decide the amount of returns you make on your investments. Since sectoral funds are cyclical in nature, your exit timing must be well-planned.
Performance: If you want to invest in these funds then don’t go by the past performances of these funds. Rather look for the opportunities in the next few years for that particular sector or theme and then proceed to invest.
Let’s try to analyse why thematic or sectoral funds may be the right option for you.
The sectoral and thematic funds are a great way to diversify your investment portfolio if you have the ability to bear the cyclical fluctuations and are looking for a long investment horizon.
These funds are also helpful for people who have advanced knowledge about the micro-trends of a particular sector like the finance sector or the energy sector. A good understanding of the sector or theme is important as these funds require active management from your side. You must carefully choose the investment timing and thus you must not enter a sector that has already saturated. Consequently, the exit timings as play an important role in deciding the overall returns you make.
If you have advanced knowledge about a particular sector or theme and prefer taking selective bets for getting high returns then these funds can help you create wealth by taking advantage of the market opportunities. If you invest your money in a sector that has high-growth potential, over time you will notice that the value of the funds increases with respect to its demand. Thus if the growth trend of a particular sector or theme predicts upward movement due to increasing demand in the coming years then you can take advantage of the market wave through thematic or sectoral funds.
These funds contain moderate to high risk and must be avoided by beginners and low-risk investors. While higher growth of a particular sector may give you exceptional returns, a sudden downturn may lead you to bear heavy losses. The main reason for losses can be attributed to the lock of diversification opportunities of the fund.
However, thematic funds are a little diversified from sectoral funds. Thus, while they may deliver higher returns when the sector is doing well, a sudden downside can erode your gains quickly.
The thematic and sectoral funds are a great way to invest in particular sectors or themes. But make sure to invest only about 10% of your investments in them. It is advised not to go overboard with your investments in thematic or sectoral funds. Keep in mind sudden losses and gains are a part of sectoral and thematic fund investments and thus these are opportunistic bets.
See Also: Become Rich by Investing in Mutual Funds
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