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Investing in Thematic funds? Plan entry and exit

By Sarbajeet K Sen
November 29, 2021 09:00 IST
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Investors need to get the timing of entry and exit right to make money in thematic and sector funds, suggests Sarbajeet K Sen.

Illustration: Uttam Ghosh/

Fund houses have launched new thematic/sectoral funds amidst the stock market boom of the past year-and-a-half to attract investors.

These themes vary from special situations, business cycles, quant, and ESG (environmental, social, and governance) to some new-age ones like electric vehicles.

Some recent offerings include ABSL Business Cycle Fund, IIFL Quant Fund and ITI Pharma and Healthcare Fund.

"Thematic funds are being launched to attract investors when markets are at all-time highs and investors are not comfortable making fresh investments in their existing schemes at these levels," says Omkeshwar Singh, head of RankMF, Samco Group.

Fund houses have tried to sell thematic offerings in the past, too.

Between 2003 and 2007, the infrastructure or Build India theme was the talk of the town.

Funds dedicated to power and commodities also made a big splash for a brief period.

However, barring a few themes such as consumption, most have not found favour with investors due to their highly cyclical performance.

While consumption theme funds have given a category average return of 17.02 per cent over the past 10 years, infrastructure funds have delivered 13.05 per cent.

Flexi-cap funds have generated 15.63 per cent return over the same period, according to data from Value Research.

Potential for high returns

Thematic funds are meant for savvy investors looking for specific solutions and high returns if those themes click.

"The key benefit of investing in such a fund is that it focuses on a specific theme and delivers superior returns if the theme does well," says S Sridharan, founder, Wealth Ladder Direct.

Concentration risk

Most themes and sectors are narrow. People investing in these schemes run high concentration risk.

"Thematic strategies usually provide concentrated exposure to a particular sector or set of companies. Since the positions are concentrated, if the theme or sector doesn't perform, the tracking error vis-a-vis market returns can be significant," says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors.

A fund manager who senses that the theme/sector's fundamentals are deteriorating, or that it is slowing down, cannot exit his positions.

"The fund manager does not have the option to take exposure to other sectors or themes as it is mandatory to invest 80 per cent in the theme/sector to which the fund belongs," says Sridharan.

Past returns are no guide

Investors often chase themes that have done well in the recent past.

Take the example of healthcare funds, which were under immense pressure till the second half of 2019.

The sector gained traction after the COVID-19 outbreak, but lost steam from H2FY21, as investors started betting on opening up trade.

These funds would have been disastrous for investors who invested in October-December 2020 based on past performance.

Returns from these funds have been suboptimal over the past year -- 28.04 per cent, compared with 50.2 per cent from flexi-cap funds.

Investors need to get the timing of entry and exit right to make money in thematic and sector funds.

"These funds are inherently risky bets if the entry is not timed properly depending on underlying market or economic conditions," says Dhawan.

Should you invest?

While investors with high risk appetite may consider thematic/sectoral offerings, most investors are better off sticking to diversified equity funds.

"Investors who can tolerate the high risk in these funds and stay invested over a 7-10-year period may allocate up to 10 per cent of their equity portfolio in them. Those with shorter horizons should avoid these funds," says Sridharan.

Dhawan advises a wait-and-watch approach.

"Allow a new thematic offering to build a robust track record before participating in it, unless it is truly unique," he advises.

Feature Presentation: Aslam Hunani/

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Sarbajeet K Sen
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