Thematic or Sectoral Mutual Funds and Mutual Fund schemes that invest in a specific sector of the economy. There have been many success stories arising from these type of funds, making them very tempting investments. Even though Thematic Funds are quite popular and have performed well in the past, there are a few things to consider before investing in such funds.
As Sectoral Funds invest in a specific sector of the economy, it is crucial to evaluate the performance on the sector. One of the main risks these funds are exposed to is Concentration risk. Concentration risk arises when the majority of the fund is invested in a failing sector. When evaluating a sector to check its performance be sure to check its future prospects as all sectors in the market go through ups and downs. Thematic funds are suitable for investors who have a high capacity for risk and are informed about the market. As these funds carry a very high level of risk, first-time investors are discouraged from making investments in these types of funds.
There are many types of thematic mutual funds based on the various sectors of the Indian economy. The most common themes adopted by mutual funds are:
Technology Funds: Technology funds are mutual funds that invest primarily in the Information Technology (IT) sector of the Indian economy. The IT sector is going through a boom right now and these funds seek to take advantage of early market cycles.
Infrastructure Funds: Infrastructure Funds primarily invest in companies that are either directly or indirectly involved in infrastructure activities in Infrastructure Funds are measured against the NIFTY Infra index. These funds seek to take advantage of the profitable market cycles this sector is going through, as India is not considered one of the fastest growing economies in the world.
Fast Moving Consumer Goods (FMCG) Fund: FMCG Funds invest in companies that manufacture Fast Moving Consumer Goods. A growing middle-class and increased spending capacity of the Indian citizen has made this sector see rapid growth, FMCG funds seek to take advantage of this growth and provide investors with good returns.
In conclusion, thematic funds have the potential to provide their investors with very good returns, but as they are exposed to concentration risk they are quite volatile in nature. Thematic funds are suited to well-informed investors who have a high capacity for risk.