Over the past 12 months, over one-third of equity mutual fund net inflows have gone into sector and thematic funds. According to AMFI data, thematic and sector funds now represent the largest equity category, managing ₹4.4 lakh crore of investors’ assets. So, why are investors drawn to thematic mutual funds? The answer lies in their strong wealth creation track record.
Riding Market Trends
Thematic funds focus on specific themes or industries, such as technology, healthcare, or energy, selecting companies positioned to benefit from these long-term trends. Unlike diversified funds that invest broadly, thematic funds target high-growth opportunities, offering a way to participate in future-focused sectors.
30 October 2024
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Value Research data shows categories like PSU Thematic Funds (31% CAGR), Energy Thematic Funds (27% CAGR), and Dividend Yield Thematic Funds (26% CAGR) have delivered stellar returns over five years, demonstrating their potential to capitalise on economic trends.
These funds offer targeted exposure to emerging themes, enhance portfolio diversification, and provide higher returns if the theme performs well. With many New Fund Offers (NFOs) being launched, such as innovation, commodities, logistics, housing, and business cycle, thematic funds enable investors to ride the right cycle and maximise gains. This is in addition to well-performing existing thematic schemes, including funds of funds investing in multiple thematic categories.
Wealth Creation Through Strategic Focus
Thematic funds’ strategic focus enables them to tap into growth stories at the right time. For instance, during a decade of strong domestic growth, thematic infrastructure funds generated 17.08% CAGR, while consumption funds yielded 16.74%. A ₹1 lakh investment 10 years ago would now be worth ₹4.5 lakh. These returns highlight the wealth creation potential of thematic funds, especially those aligned with long-term economic trends.
Additionally, thematic funds often invest in innovative sectors like technology and healthcare, which have shown higher returns during periods of growth, such as the pandemic. Their concentrated nature allows them to outperform diversified funds when their theme is in favour.
Adapting to Cycles and Managing Risks
Thematic funds are not only about high returns; they also provide resilience during market fluctuations. They adapt to market cycles, with defensive sectors like telecom, FMCG, and utilities performing well during slow growth. This adaptability makes them an effective hedge against traditional investments, enhancing overall wealth creation.
Furthermore, thematic investing aligns portfolios with key market trends, such as AI in technology, healthcare innovations, and the global shift to renewable energy. By investing in companies benefiting from these structural changes, thematic funds offer a better chance to participate in future opportunities.
While it’s important to be aware of risks, such as concentration risk and market volatility, the long-term rewards of thematic funds can be significant. For investors willing to stay the course, the potential for strong returns often outweighs the downsides.
Conclusion
Thematic funds provide a powerful tool for wealth creation by tapping into the right themes at the right time. Their targeted approach, ability to adapt to market conditions, and focus on high-growth sectors make them an appealing option for long-term investors seeking opportunities aligned with future economic trends.
Disclaimer: The Views are Personal and not a part of the Outlook Money Editorial Feature
