The three popular categories of equity funds—
Equity-linked savings scheme (ELSS),
Sectoral Funds and
Thematic funds
Thematic funds. These schemes invest in stocks of companies with a specific theme, such as the rural economy, infrastructure, real estate, financial services, and so on. They choose their investments around an idea that can span several sectors. Here, the risk element is not as concentrated as that in a sectoral fund, but more concentrated than in a diversified equity fund. For example, an infrastructure fund is a thematic fund that could invest in metals, construction, roadways and a range of sectors it believes will benefit from higher government spending. Thematic and sectoral funds are for investors who have a diversified portfolio and are willing to allocate a small portion for higher returns. Such investors should actively manage their portfolios, track sector performance and take decisions on entry and exit.
Sector funds are suitable for investors who have knowledge about a sector, and about whose future performance they are convinced. These schemes should not be looked at as complete investment solutions as they can give a tremendous boost to returns, but the fall can be equally swift. There could be periods when sector-specific funds do well, but over the long term, chances of outperformance are more with diversified funds.
