When you hear about stock markets, most people think of broad-based mutual funds or simple index investing. But what if you could put your money in a fund that focuses solely on big, rising trends like electric vehicles, renewable energy, digital India, or healthcare innovation? That's where thematic funds come in.
Over 24.13 crore people are investing in mutual funds, and Thematic funds have emerged as the largest category (15%) within the equity segment. Additionally, among the 70 NFOs (New Fund Offers) launched in FY2025, 52 were purely thematic funds. So, why are investors keen to invest in these funds?
Through this blog, let us explore the meaning of thematic funds, how they work, the key benefits they offer, who should invest in them, and why they are becoming a popular investment option in India.
(**Spoiler alert: Thematic funds are exciting, but they have their own features. Keep reading to see if they're for you or not!)
What Are Thematic Funds?
Thematic funds are a variant of mutual funds that focus on one theme or sector. In short, these funds share a common idea or theme. Based on this, the fund manager identifies companies that align with the basket/theme and subsequently invests in them.
These themes could include;
- Technology & Digital India
- Renewable Energy and EVs
- Healthcare and Pharma
- Artificial Intelligence
- Tourism
- Railways
- ESG (Environmental, Social, Governance)
- Lifestyle and Consumption, etc.
This list of themes can include many others. In simple words, think of thematic mutual funds as a painting that focuses on a single theme (like sorrow, happiness, celebration). However, within the same painting, you will see multiple elements (representing companies) related to the theme.
How Do Thematic Mutual Funds Work?
Unlike other funds, the thematic meaning in a mutual fund stems from the theme selected. Instead of spreading money across the market or any index, the fund manager invests only in companies that fit a specific theme.
Once the theme is selected, the fund manager analyzes the market and selects companies that align with the theme. For example, in an EV (Electric Vehicle) theme fund, the portfolio may include battery makers, charging infrastructure companies, and auto manufacturers.
With the basket created, the fund invests in them while seeking diversification and rebalancing whenever required.
Key Features and Benefits of Thematic Funds
If you plan to invest in thematic funds, be sure to consider the features and benefits you will receive in return.
- Theme-based investing: The entire fund is built around a single idea or trend, such as electric vehicles (EVs), digital India, or renewable energy.
- Broader than sector funds - Instead of focusing on a single sector, this fund can include multiple sectors as long as they are connected to the theme.
- Medium- to long-term horizon - These themes unfold over years, so patience is crucial.
- Higher volatility: With a concentration on a single theme, risk can escalate compared to other funds.
- Active fund management: Over here, fund managers actively take part in research and pick stocks aligned with the theme.
Benefits of Thematic Funds
With thematic fund investing, you can gain the following benefits for your portfolio, which include;
- Through the different themes available, you get the opportunity to participate in megatrends.
- Definitely, thematic funds open doors for multiple ideas. With that said, you don't need to pick individual stocks as the fund manager does it for you.
- Provides portfolio diversification and adds exposure to sectors or industries that traditional funds might miss.
- There are chances for high return potential if the chosen theme succeeds.
- If you believe in a particular theme's future, these funds can fuel your thoughts and investments as well.
Types of Thematic Mutual Funds
Apart from the sector, the asset allocation can also depend on style and factor-based investing. For instance;
Style-based Themes
- Value Stocks: These are companies that are undervalued, trading below their intrinsic worth. They usually have low P/E or P/B ratios and may be out of favor temporarily.
- Growth Stocks: It includes companies with high future earnings potential and revenue growth, even if they're currently expensive.
- Momentum Stocks: These stocks exhibit strong price trends, trying to rise fast and outperform the market.
- Low-Volatility Stocks: These offer stable returns with lower price swings and tend to perform well during market downturns.
- Quality Stocks - High-quality companies with strong fundamentals, consistent profitability, low debt, and high ROE.
Other themes include factor-based investing that focuses on low volatility and momentum. With these, one's portfolio can expand by managing the market cycles.
How To Invest In Thematic Funds
Investing in thematic funds is quite straightforward, but it's important to approach them with clarity and discipline.
If you plan to invest, here's how you can get started:
- Identify a Theme You Believe In: Choose a theme you feel confident about and its future, such as pharma, AI, technology, etc.
- Research Available Funds: Check which mutual fund houses offer schemes related to that theme and compare their track records, expense ratios, and portfolios. That's where the whole point of investment safety lies.
- Align with Your Goals: Before getting to invest, ensure that the theme aligns with your overall financial plan and risk appetite. After all, mutual funds are for long-term, not any quick gains.
- Choose SIP or Lump Sum: If you want to average out market volatility, start with a SIP. If you're confident about the theme and market timing, a lump sum is also an option.
- Invest Through Platforms: You can invest via mutual fund apps, online brokers, or directly through the AMC (Asset Management Company) website.
- Monitor and Review: Keep track of the fund's performance and review it at least annually. Also, continue to review the fund and exit if the theme no longer aligns with your expectations.
Examples of Thematic Mutual Funds In India
Some examples of thematic mutual funds in India are:
- ICICI Prudential Manufacturing Fund
- Edelweiss Recently Listed IPO Fund Direct-Growth
- Invesco India Infrastructure Fund
- DSP Healthcare Fund
- Quant ESG Equity Fund, etc.
How Are They Different from Sector Funds?
Since both sectoral and thematic funds involve concentrated investing, it's possible to mix them up. However, there's a small yet significant difference. Regardless of whether they fit into a larger story, sector funds only invest in businesses within a certain industry, such as banking or energy. On the other hand, thematic funds have a narrative that may cover several different industries.
For instance, businesses from the utilities, industrial, and technological sectors might be included in a clean energy theme. Therefore, thematic funds are more adaptable in capturing value from several perspectives of a shared trend. In contrast, sector funds are restricted to a specific segment of the economy.
Conclusion
From this blog, you have now understood that not all thematic funds are sector-based. Definitely, they sometimes align towards a sector, but overall, they focus on a particular theme. Thematic mutual funds delve into themes that support causes you care about, such as the digital economy, healthcare, or electric vehicles.
Also, they do pose a unique set of dangers and demand thorough study, just like any other investment. Before any decision, consult a professional or conduct your research. Lastly, consider adding thematic funds to your portfolio if your research and instincts support it.
