Thematic funds are a type of mutual fund that focuses on investing in specific themes or sectors, such as technology, consumption, manufacturing, and others. There are several well-known thematic funds in this category that have assets under management (AUM) exceeding 4,000 to 5,000 core.

The rise and rise of thematic funds in India

Mutual fund asset management companies (AMCs) have been launching thematic funds on a regular basis for various reasons. There are several factors that contribute to this trend.

• One primary reason for the frequent launch of thematic funds by AMCs is the SEBI-imposed cap on expense ratios. The maximum expense ratio charged by AMC is now limited to 2.25% per year. The expense ratio can differ from scheme to scheme, and a lower AUM in a particular fund allows the AMC to charge a higher expense ratio.

  Sr.no	AUM (Crore)	TER (Equity Schemes) %
  1	0-500	2.25
  2	500-750	2
  3	750-2000	1.75
  4	2000-5000	1.6
  5	5000-10000	1.5
  6	10000-50000	TER reduction of 0.05% for every increase of 5,000 crores AUM or part thereof
  7	>50,000	1.05

  Source:- AMFI

  When a mutual fund company launches a new fund offer (NFO), they typically receive a significant amount of lump sum investments. However, since the fund is new, its assets under management (AUM) are initially lower compared to established funds, such as mid-cap or large-cap funds. This lower AUM of the new scheme allows the company to potentially charge a higher expense ratio.

• Another significant reason for the frequent launch of thematic funds is the strong attraction these funds hold for many investors. Investors are often drawn to theme-based funds due to their specific investment focus and potential alignment with their own beliefs or expectations about certain sectors or themes. Additionally, the appealing and descriptive names given to these funds, such as “business cycle fund” or “consumption fund,” further pique investor interest.
• A third significant reason for the frequent launch of thematic funds by AMCs is the regulatory flexibility provided by SEBI. According to SEBI regulations, an AMC is restricted from launching multiple funds in the same category. For example, if an AMC launches a large-cap fund, it cannot launch another large-cap fund in the future. However, in the case of thematic funds, AMCs have the freedom to launch multiple funds based on different themes, such as consumer funds, housing opportunity funds, digital India funds, and more.

This regulatory flexibility allows AMCs to continuously introduce new fund offers (NFOs) in different thematic categories. and NFOs serve as a preferred method for AMCs to attract new funds from investors.

What is wrong with thematic fund?

Investors who choose to invest in theme-based funds often have a positive outlook on the specific theme they have selected. However, it’s important to note that some theme-based funds may have underlying stocks that are also present in other category funds. This can lead to overlapping holdings and reduce the uniqueness of the investment.

Additionally, investors can sometimes become overly optimistic about a particular sector or theme, which can result in unrealistic expectations for the performance of theme-based funds. If the funds fail to meet these high expectations, investors may be disappointed with the returns.

Furthermore, theme-based funds often require a tactical approach, necessitating precise timing for entering and exiting specific themes. Successfully navigating these timing decisions can be challenging, and if investors fail to execute them effectively, it can impact their overall returns.

Is it an advisable investment or not?

Determining whether to invest in or avoid theme-based funds requires careful consideration and analysis. As an investment advisor, I recommend the following approach:

Conduct thorough analysis: Before investing in a theme-based fund, it is crucial to perform comprehensive micro and macro analysis. Understand the specific sector or theme, assess its growth potential, evaluate market dynamics, and consider any associated risks. This analysis will help you make an informed investment decision.

Develop a strong understanding of Gain a deep understanding of the chosen sector or theme. Follow industry trends, stay updated on relevant news and events, and assess long-term prospects. If you have a strong grip on the sector and are convinced about its future potential, investing in a relevant theme-based fund may be suitable.

Seek professional advice: consult with a financial or investment advisor who can provide guidance based on your individual circumstances. They can help you assess the suitability of theme-based funds within your overall investment strategy and provide insights into potential risks and rewards.

Conclusion

In summary, if you possess the capability to conduct a thorough analysis, have a strong understanding of a specific sector or theme, and are convinced about its future prospects, investing in a relevant theme-based fund can be a viable option. However, seeking professional advice, regularly reviewing your portfolio, and maintaining a well-balanced asset allocation are essential components of successful investing.

I wish you safety and success in your investment journey. Stay secure and continue to make informed investment decisions. May your investments bring you happiness and fruitful returns.

Sarthak Patel

Sarthak Patel is a dedicated and accomplished wealth manager at UpperCrust. With a strong foundation in financial expertise and a passion for helping individuals achieve their financial goals, Sarthak has also cleared the NISM Investment Advisor Level 1 and Level 2 exams.