Thematic Funds

Mutual funds that follow a particular theme are known as "Thematic Funds." This theme can collide with the sectors available. However, they are different from the sectoral mutual funds.

Here, the fund manager spreads the funds in stocks belonging to a theme. For instance, a fund following a tourism theme will invest in a collective category of stocks that are influenced by this industry.

Some of the common themes include;

• Technology & Digital India
• Renewable Energy and EVs
• Defence
• Infrastructure & Logistics
• Healthcare and Pharma
• Non-Cyclical Consumer
• Artificial Intelligence
• Media
• Tourism
• Railways
• ESG (Environmental, Social, Governance)
• Lifestyle and Consumption, etc.

This list of theme baskets can be endless, depending on its potential and geography. At this point, if the market news evolves around the fund's theme, the portfolio will also react in the same manner.

Unlike any equity mutual fund, the investors' money is pooled and invested in company stocks that belong to that theme. With the available pool, the fund manager will invest in the respective theme and ensure its active management. However, the selection of a theme involves intensive research and analysis before picking one.

As per the SEBI guidelines, the fund manager must invest at least 80% of the funds in equities. Likewise, distribute the rest among debt or liquid instruments like cash.

With the flexibility available, they can increase/decrease the asset allocation, yet maintain an 80% equity slot. At the same time, it's not necessary to invest in these alternatives.

Additionally, the fund house must "mention the theme name" for the investor's understanding.

While these MFs cater to a specific idea, thematic mutual funds can also suit.

• Those with a high-risk bearing profile and can manage the volatility of these theme-based stocks.
• Believe in a specific long-term theme – such as technology, infrastructure, or ESG and want focused exposure to it.
• Understand market cycles and are comfortable with concentrated portfolios.
• Lastly, investors with a longer investment horizon of three years or more, as these themes may take time to realize returns.

Looking To Invest In Thematic Investment Funds?

With Anand Rathi, investing in thematic mutual funds is a 5-step process – here's how you can:

Every equity fund has a different objective to cater to, and thematic equity funds are no exception. Looking at the factors below can help you assess a better one:

• Theme Understanding – Before investing in any thematic equity fund, understanding what the fund is important. It is only when you are aware of the theme that you can estimate its long-term potential.
• Concentration Risk – Every theme will have a certain bias towards a sector, which can increase portfolio risk during market downturns.
• Fund Manager Expertise - Check the fund manager's track record and how they have managed the fund in market trends within the chosen theme.
• Performance And Costs - Alongside the fund's theme and manager's experience, one should also review past performance, expense ratio, Net Asset Value (NAV), and consistency of fund compared to benchmark indices.

Similar to equity mutual funds, even thematic funds follow the same taxation rules (LTCG and STCG).

• If units are sold within 12 months: Gains are taxed at 20% as Short-Term Capital Gains (STCG).
• For units held longer than 12 months: Gains up to ₹1.25 lakh are tax-exempt, and those exceeding ₹1.25 lakh are taxed at 12.5% LTCG.