Thematic funds have been a very popular category since the last two years. AMCs are regularly coming up with innovations and thematic is one category where they have really worked a lot. It is gaining momentum but it is not for all types of investors. What exactly is a thematic fund? How different is it from a sector fund?
Thematic funds try to bring in different businesses which could be interlinked by a central theme. That is a thematic fund. A sector could be one of those interlinking ideas which become a thematic fund. I would say a sector fund and a thematic fund are separate in that sense. A theme can also evolve with time but a sector fund will be only specific to one specific sector. So its investment objective will be slightly limited while a thematic fund’s investment objective will be slightly broad.
To give an example, it’s the difference between a consumption fund and an FMCG fund. An FMCG is one of the things which you and I would consume but a consumption fund could be about housing, it could be about financial services, it could be about FMCG, about food and many other things while an FMCG fund would be a specific part of a sector fund because it only invests into a certain set of businesses.
What should be your criteria for including this kind of fund in a portfolio?
I would say three things; first, prior to considering thematic funds for anyone’s portfolio, our view would be to first have your core portfolio correct and built up according to your mainstream investment objectives and funds which are for that purposes whether these are mutual funds or anything else get your core portfolio right.
Second, for building as an add on to the core portfolio, one can consider thematic funds.
Third, start small and consider the themes which somebody is more accustomed to or would be aware of. Then start building up the rest of the portfolios but not at the cost of your core objectives and core investments.
How can one identify themes because how many themes do we have and as per that, one needs to decide the risk appetite and then select a theme or one needs to align that particular theme with your goal. How can one club it?
I would always say that any investment should be linked to the risk profile of the investor and their investment objective. Somebody with a slightly more risk appetite in their portfolios and with a longer investment tenure, could consider thematic funds because they have a certain objective, are slightly more concentrated than probably the core products which are more diversified.
Therefore anybody who understands the risk of a slightly limited mandate investment, could consider these funds. The second question was what they should consider. They should look at the themes which they are comfortable with. They could also look at themes which are domestic to India. For example, consumption, manufacturing are some of the key themes of financial services which are long term themes in India. They could also consider some of the international themes and ideas which are currently not available in India like investments in tech companies or electric vehicles, artificial intelligence and so on which are evolving outside India.
So one cannot have this thematic category as their first fund?
Ideally, not necessarily, very few investors would have that as their first funds but they would be quite evolved or they would have understood that theme much more but the majority should look at thematic funds after they have built their core and foundation portfolio.
What happens is you are already well diversified in your core portfolio because you are lining it up with your goals. Now to have a thematic fund would not that be a repetition of investment in your portfolio? How should one segregate that?
Usually when you look at core portfolios, the mainstream funds are basically diversified funds but they are clubbed together by size. So, it is basically market cap over the businesses. If you have the large companies, then you have all large companies put together and then within that you get different sectors which is an outcome. If you take at the top 100 companies, they may be petroleum companies, banking companies or whatever, but that is not under your control as you have clubbed them by size. They are your diversified funds and they are your core portfolios.
For thematic, you are basically looking at different businesses and are taking businesses put together and then the size could be an outcome. They are slightly different behaviour-wise than normal funds. One way of looking at it is market cap over business is your core portfolio, business over market cap is your thematic products. Naturally when you take similar linking businesses together, they would come with a certain amount of risk because when they go up, they go up together. When they are not doing well, they may not be doing well together. Therefore your exposure needs to be slightly limited and with a long time tenure in mind.
So a sector fund and a thematic fund will clash in the portfolio or it is fine?
It would be slightly clash and the sector would be slightly limited in its mandate. I would say if you have to go for a thematic fund, then go for a theme which will keep on evolving, so that you do not have to keep on adding or getting in or out of sector funds.
As the themes evolve, new sectors may come into a thematic fund may also go out while in a sector fund you need to take the call that this was the right time to enter and also the right time to exit from that funds because they have a limited mandate. A thematic funds mandate will keep on changing with time it will be evolving so you can take a longer tenure investment in that.
So what will be the role of a fund manager in a thematic fund? You know you have got to cater to a particular sector and companies and basically to the sector? So how does a fund manager operate here?
A fund manager would look at what is the current status of the theme. Let us give an example to answer that if you were to look at a consumption thematic product today. 20 years back it was just basic consumption which is food, your housing, your shelter and what we used to call as roti, kapda, makaan basic requirements.
Today it has turned into financial services along with the main things: your travel is a part of your consumption, your financial services and whatever we are consuming. Telecom is a part of our consumption, the internet is a part of our consumption. Had it only been a banking fund or a consumption idea. As it evolves, the consumption fund is able to pick up what is this. So the fund manager is also able to recognize the trends and therefore being able to invest into these ideas as the whole profile changes.
How can one diversify internationally in thematic funds?
Currently through the international funds available in India, investors can look at such themes which are technically not available in India. There are some international mutual funds available. There are some which have restrictions but there are some other ideas which are still available where investors could look at some of the themes which are global in nature and invest through them through mutual funds. Of course, they should always keep the risk in mind and the ideas which they are investing in should be suitable to their investment horizon and risk profile.
So one needs to be invested for a long term period in a thematic fund, is that what you are suggesting?
I would suggest that, yes you are right.
The performance of a theme-based fund can also change, depending on market conditions and other reforms. It depends on what the fund is all about. One needs to keep a track of that to be in that fund?
Absolutely, it is always imperative that an investor looks at themes from a long period of time and also understand that all themes like every business go through cycles. If those business cycles are of a long tenure, over a period of time, those risks actually play down because you have the power of compounding and time invested helping you. I would suggest that anybody considering thematic funds should consider them for a long period of time so that the risk plays down over a period of time. Entry and exit is not an issue and overall it should fitsinto your risk profile.
Talking about entry and exit, is the process of investing in a thematic fund the same as in regular other funds?
Absolutely, you could do it as a lump sum investment, you could do it through an SIP or an STP, whichever is convenient to the investor. They have the same rules and regulations as any normal mutual fund would have.
Is it also a very high risk fund for which you need to have a high risk appetite?
Usually they tend to have a slightly more risk profile but if investors were to stay invested and invest with small amounts over a period of time, that risk can be managed. But yes, they should be cognizant that there is a certain risk attached to thematic funds which is not as much as the normal diversified funds.