Thematic funds should be considered only if you have built up a sizeable portfolio and allocated your assets appropriately
WHO IS IT MEANT FOR?
Strictly speaking, if you’re a first-time investor, then a thematic fund may not be the right kind of product for you. For a first time investor, diversified equity funds should be the first step. Thematic funds are generally seen as more of a product for informed investors. An investor should look at investing in thematic funds only after one has built up a sizeable portfolio and has allocated one’s assets appropriately. What this means is that you should explore thematic funds only after you have an adequate exposure to both small cap and mid-cap stocks and have the capacity to bear a sizeable amount of risk. Even then experts recommend minimal exposure.
FALLOUTS
At any given time, there is generally one segment in which more interest is shown than others, which then becomes the flavour of the season. Investors immediately begin clamouring for it. However, the fallout of this is that some themes or flavours get taken to unwarranted heights and the effects are immediately on the price. The prices of stocks go skyrocketing in such a situation and much beyond their intrinsic value. Too much money begins chasing too few stocks and they immediately get overvalued.
RISKS AHEAD
Investors looking at putting their hard-earned money into thematic funds need to be aware that there is a sufficiently high level of risk associated with them. It is a classic case of putting all your eggs into one basket and by investing in concentrated segments, you are perhaps putting yourself in a precarious position.
However, mutual fund houses strategise as much as they can to reduce the level of risk involved. The method is simple and involves a small amount of diversification. For instance, when a mutual fund house comes out with a theme fund on infrastructure, it does not solely invest in the stocks of infrastructure companies but also puts money into stocks of allied sectors like steel. When a particular sector then takes a hit, the fund relies on these stocks to support it, if not bail them out of the situation.
DECISION-MAKING
The key to deciding whether or not to invest in a particular theme fund lies in asking yourself the crucial question of why that particular theme is enjoying the importance at the moment. Once you have a satisfactory answer, the next thing you need to ask is the prospects of that particular theme. Queries on that front are generally addressed by doing a thorough search and taking into account all stocks, private equity, earnings and possibilities of growth associated with that theme.
The performance of your theme also depends on the fund manager’s skill to identify the funds with growth potential. Only about 20 in every 100 themes are known to give positive results. Moreover, you cannot decide your theme based entirely on the positive results shown by the theme in other markets and need to check for its viability in your market.
One should not give undue importance to looking at the track record of that particular thematic fund. Given the vacillating nature of theme funds, investors should take a more holistic view and look at the track record of the fund house also by the performance of the other funds that come under its purview.
FUTURE PROSPECTS
Timing is crucial in terms of investing in thematic funds and experts recommend that investors need to give the thematic fund a period of three to five years to pan out and begin to perform well. As for the performance of thematic funds in India, experts say the early entrants into the industry, which invested a few years ago, have a definite advantage.
Looking ahead, experts have a few recommendations in terms of sectors or theme that could possibly yield good returns. Infrastructure is perhaps the top of the list, followed by financial services and the energy sector. Investors should look at putting their money in these sectors through a systematic investment plan over 5-10 years.
WHO IS IT MEANT FOR?
Strictly speaking, if you’re a first-time investor, then a thematic fund may not be the right kind of product for you. For a first time investor, diversified equity funds should be the first step. Thematic funds are generally seen as more of a product for informed investors. An investor should look at investing in thematic funds only after one has built up a sizeable portfolio and has allocated one’s assets appropriately. What this means is that you should explore thematic funds only after you have an adequate exposure to both small cap and mid-cap stocks and have the capacity to bear a sizeable amount of risk. Even then experts recommend minimal exposure.
FALLOUTS
At any given time, there is generally one segment in which more interest is shown than others, which then becomes the flavour of the season. Investors immediately begin clamouring for it. However, the fallout of this is that some themes or flavours get taken to unwarranted heights and the effects are immediately on the price. The prices of stocks go skyrocketing in such a situation and much beyond their intrinsic value. Too much money begins chasing too few stocks and they immediately get overvalued.
RISKS AHEAD
Investors looking at putting their hard-earned money into thematic funds need to be aware that there is a sufficiently high level of risk associated with them. It is a classic case of putting all your eggs into one basket and by investing in concentrated segments, you are perhaps putting yourself in a precarious position.
However, mutual fund houses strategise as much as they can to reduce the level of risk involved. The method is simple and involves a small amount of diversification. For instance, when a mutual fund house comes out with a theme fund on infrastructure, it does not solely invest in the stocks of infrastructure companies but also puts money into stocks of allied sectors like steel. When a particular sector then takes a hit, the fund relies on these stocks to support it, if not bail them out of the situation.
DECISION-MAKING
The key to deciding whether or not to invest in a particular theme fund lies in asking yourself the crucial question of why that particular theme is enjoying the importance at the moment. Once you have a satisfactory answer, the next thing you need to ask is the prospects of that particular theme. Queries on that front are generally addressed by doing a thorough search and taking into account all stocks, private equity, earnings and possibilities of growth associated with that theme.
The performance of your theme also depends on the fund manager’s skill to identify the funds with growth potential. Only about 20 in every 100 themes are known to give positive results. Moreover, you cannot decide your theme based entirely on the positive results shown by the theme in other markets and need to check for its viability in your market.
One should not give undue importance to looking at the track record of that particular thematic fund. Given the vacillating nature of theme funds, investors should take a more holistic view and look at the track record of the fund house also by the performance of the other funds that come under its purview.
FUTURE PROSPECTS
Timing is crucial in terms of investing in thematic funds and experts recommend that investors need to give the thematic fund a period of three to five years to pan out and begin to perform well. As for the performance of thematic funds in India, experts say the early entrants into the industry, which invested a few years ago, have a definite advantage.
Looking ahead, experts have a few recommendations in terms of sectors or theme that could possibly yield good returns. Infrastructure is perhaps the top of the list, followed by financial services and the energy sector. Investors should look at putting their money in these sectors through a systematic investment plan over 5-10 years.
