Get Best Investment Advice & Invest in Thematic Equity Funds in India

A Thematic Mutual Fund is a type of equity mutual fund that invests in a company’s stock that is focused on specific themes such as infrastructure, consumption, or innovation etc. These funds can invest in multiple sectors that are connected by a common theme, unlike sectoral funds that focus on a single industry. For example, a "Green Energy" thematic fund might invest in solar power companies, wind energy firms, and electric vehicle manufacturers.

Key Features of Thematic Mutual Funds:

• Focused Investment: These funds invest in companies aligned with the chosen theme, offering exposure to related industries.
• High Risk-High Reward: Thematic mutual funds can be more volatile than diversified funds, with potential for higher returns or losses.
• Long-Term Perspective: They typically require a longer investment horizon to ride through market cycles linked to the theme.
• Diversification within Theme: While the fund focuses on a theme, it still diversifies across multiple sectors and companies within that theme.

Top schemes of Thematic Mutual Funds sorted by Returns

HDFC Defence Fund - Direct Plan - Growth

The HDFC Defence Fund has 96.74% of its investments in domestic equities. Out of these investments, 6.57% goes into Large Cap stocks, 19.4% goes into Mid Cap stocks, and 26.3% goes into Small Cap stocks. 

In the past one year, the fund has offered 111.84% annualized returns. This fund is suitable for those who have an advanced knowledge of macro trends and prefer taking a leap for high returns. However, consider that it’s a high risk fund. 

Invesco India PSU Equity Fund - Direct Plan - Growth

The Invesco India PSU Equity Fund has 97.47% of its investments in domestic equities. Out of these investments, 53.2% goes into Large Cap stocks, 16.9% goes into Mid Cap stocks, and 6.31% goes into Small Cap stocks. 

In the past three years, the fund has offered 41.22% annualized returns and in the past five years, it has offered 35.23% annualized returns. This fund is suitable for those who have an advanced knowledge of macro trends and prefer taking a leap for high returns. However, consider that it’s a high risk fund.

SBI PSU Fund - Direct Plan - Growth

The SBI PSU Fund invests 90.98% of its assets in domestic equities, out of which 57.6% is in Large Cap stocks, 20.95% is in Mid Cap stocks, and 6.14% is in Small Cap stocks. 

In the past three years, the fund has offered 42.96% annualized returns and in the past five years, it has offered 30.58% annualized returns. The fund is good for investors with an advanced knowledge of macro trends and prefer taking high risks for high returns.

Aditya Birla Sun Life PSU Equity Fund - Direct Plan - Growth

The Aditya Birla Sun Life PSU Equity Fund invests 97.79% of its assets in domestic equities, out of which 56.04% is in Large Cap stocks, 25.23% is in Mid Cap stocks, and 7.86% is in Small Cap stocks. 

In the past three years, the fund has offered 43.68% annualized returns. The fund is good for investors with an advanced knowledge of macro trends and prefer taking high risks for high returns.

ICICI Prudential PSU Equity Fund - Direct Plan - Growth

The ICICI Prudential PSU Equity Fund has 84.05% of its investments in domestic equities. Out of these investments, 64.21% goes into Large Cap stocks, 12.22% goes into Mid Cap stocks, and 2.98% goes into Small Cap stocks. It also has 0.92% investments in debt instruments.

In the past one year, the fund has offered 91.14% annualized returns. It’s a high risk fund which is suitable only for investors with advanced knowledge of macro trends. 

LIC MF Infrastructure Fund - Direct Plan - Growth

The LIC MF Infrastructure Fund invests 94.06% of its assets in domestic equities, out of which 9.72% is in Large Cap stocks, 16.59% is in Mid Cap stocks, and 40.5% is in Small Cap stocks. 

In the past three years, the fund has offered 38.54% annualized returns and in the past five years, it has offered 32.29% annualized returns. The fund is suitable for investors with an advanced knowledge of macro trends and prefer taking high risks for high returns.

Bandhan Infrastructure Fund - Direct Plan - Growth

This fund has 83.53% of its investments in domestic equities, of which 23.21% is in Large Cap stocks, 14.26% is in Mid Cap stocks, and 34.46% is in Small Cap stocks. 

The fund has provided 35.71% annualized returns in the past three years, and 34.90% returns in the past five years. Only the investors with an advanced knowledge of macro trends should take a leap in this high-risk fund.

Invesco India Infrastructure Fund - Direct Plan - Growth

The Invesco India Infrastructure Fund has 97.82% of its investments in domestic equities, of which 28.11% is in Large Cap stocks, 25.64% is in Mid Cap stocks, and 24.4% is in Small Cap stocks. 

This fund has provided 35.20% annualized returns in the past three years, and 35.50% returns in the past five years. It’s suitable for only the investors with an advanced knowledge of macro trends and a high risk tolerance.

Quant Infrastructure Fund - Direct Plan - Growth

The Quant Infrastructure Fund invests 85.57% of its assets in domestic equities, out of which 23.32% is in Large Cap stocks, 21.44% is in Mid Cap stocks, and 22.91% is in Small Cap stocks. This fund also has 3.88% investment in debt instruments.

In the past three years, the fund has offered 37.16% annualized returns and in the past five years, it has offered 42.07% annualized returns. The fund is good for investors with an advanced knowledge of macro trends and prefer taking high risks for high returns.

Franklin India Opportunities Fund - Direct - Growth

This fund has 93.51% of its investments in domestic equities, of which 31.61% is in Large Cap stocks, 9.84% is in Mid Cap stocks, and 25% is in Small Cap stocks. 

The fund has provided 31.52% annualized returns in the past three years, and 31.07% returns in the past five years. It’s a high-risk fund that is suitable for investors with an advanced knowledge of macro trends.

Also Read: Best sip plan for Rs 1000/month

How Thematic Mutual Funds work

Thematic Mutual Funds work by investing in a portfolio of companies that are aligned with a particular theme or trend. Here's how they operate:

• The fund managers identify a broad economic or social trend that has the potential for growth. For example, themes like renewable energy, innovation, etc.
• Extensive research is conducted to identify companies that have strong fundamental from various sectors and industries to diversify the fund and manage risk
• The fund manager continuously monitors the market and the companies within the portfolio to ensure they remain aligned with the theme and have potential for growth.
• The performance of thematic funds is closely tied to the success of the underlying theme. If the theme performs well, the fund is likely to see good returns. Conversely, if the theme underperforms, the fund's returns may suffer. Thus, fund managers may adjust the portfolio by adding or removing companies to maximize returns based on market trends, performance, and new opportunities.
• These funds are typically better suited for investors with a long-term horizon because of their concentrated nature. As these funds are more volatile than diversified equity funds, with the potential for both higher returns and higher risks.

Advantages of Investing in Thematic Mutual Funds

• Thematic funds are high growth potential funds and investing in them can provide significant returns as the theme trend gains momentum over time.
• These funds allow investors to tap into emerging economic trends or sectors that have the potential for substantial growth, such as technology, healthcare, or green energy.
• Unlike sector funds that focus on a single industry, thematic funds diversify across multiple sectors related to the theme, potentially reducing sector-specific risks. By investing in them investors gain broader market exposure while still focusing on a specific trend.
• Thematic funds allow investors to align their investments with their personal beliefs or interests, such as environmental sustainability, social responsibility, or innovation.

Disadvantages of Investing in Thematic Mutual Funds

• Thematic funds focus on a specific theme, which can lead to higher volatility compared to more diversified funds. If the theme underperforms, the fund's returns can be significantly affected.
• The performance of thematic funds is often tied to market cycles and specific economic trends, which can be unpredictable and subject to sudden changes.
• The themes targeted by these funds may take years to fully mature and generate significant returns, thus suitable for a long-term perspective and should not be exposed to more than 10% of the portfolio.
• While there is diversification within the theme, the overall focus on a single trend can limit diversification compared to a more broadly diversified mutual fund.
• There may be overlap between sectors within the theme, increasing the risk if those sectors face headwinds and investors may need to wait through periods of underperformance as the theme evolves.
• Thematic funds are often actively managed, which can lead to higher expense ratios compared to passively managed funds or index funds.

How to Invest in Thematic Mutual Funds in ZFunds?

Here are a few quick steps to invest in thematic mutual funds in ZFunds to avail all the benefits:

1. Install the ZFunds app from the Google Play Store or Apple App Store..
2. Complete your KYC and registration on the app.
3. Enter your personal credentials to login.
4. Select the thematic fund you want to invest into.
5. Choose whether you want to go with an SIP or a lump-sum investment.
6. Enter the amount you want to invest.

And then click on the “Invest Now” button. 

Also Read: Best Mutual Fund app

Taxability of Thematic Funds

Thematic funds are subject to specific tax regulations in India. The tax treatment of sectoral funds depends on the holding period of the investment.

1. Short-Term Capital Gains (STCG)- If the thematic fund units are sold within 12 months of investment, the gains are classified as short-term capital gain and taxed at 20%.

2. Long-Term Capital Gains (LTCG)- If the thematic fund units are held for more than 12 months (1 years) from the month of investment, then the gains are classified as long-term capital gains and are taxed at 12.50%.

Conclusion

Investing in thematic mutual funds can be highly rewarding for those who believe in the long-term potential of specific themes, economic or social trends. These funds can be quite volatile due to their concentrated exposure to certain themes, making them more susceptible to market fluctuations. Therefore, it's crucial to align such investments with your risk tolerance and long-term goals. Limiting your exposure to around 10% of your overall portfolio can help mitigate risk while still allowing you to potentially benefit from the growth of the chosen theme. Diversification within your broader investment strategy is key to balancing the potential rewards and risks of thematic funds.

Also Read: Systematic Investment Plan

FAQs

1. What is a thematic equity fund?

Thematic equity funds are a type of mutual funds that invest in stocks of companies that are tied to a specific theme or trend. They aim to make profits out of emerging trends and sectors with potential growth.

2. Are thematic mutual funds good?

Thematic funds can offer exceptional returns if the selected themes perform well. However, predicting the right themes and trends requires thorough research and thus, it’s not easy. If invested in the right theme, thematic mutual funds can be significantly profitable.

3. What is the difference between thematic and sectoral funds?

Both thematic and sectoral funds invest at least 80% of their assets in a specific theme or sector. The main difference is that thematic funds invest in multiple sectors aligning with a theme, while sectoral funds invest in one chosen sector. Due to the diversification, thematic funds are less risky than sectoral funds. 

4. What is the percentage of equity in thematic funds?

Thematic funds invest a minimum of 80% of their assets in equity and equity-related instruments that are tied to their selected theme.