What are thematic funds? Should you invest or not?

Thematic funds are the next step to increase alpha in your portfolio. But did you know that choosing the wrong one can drag your portfolio down immensely? In an ETMarkets Exclusive interview, we spoke to Arun Kumar, VP & Head of Research, FundsIndia to decode everything that you need to know about thematic funds.

What are thematic funds? How are thematic funds different from other ones in the market?
It is a spectrum. On one end of the spectrum, you have diversified funds, and on the other end you have sector funds. In the middle, lies thematic funds. Diversified funds are a mix of large, midcaps, small-caps, flexicaps etc. The broad idea is that the fund manager does not only focus on one particular sector but can pick stocks from different sectors. In diversified funds, there are at least five sectors and 10-15 sectors. In diversified funds, you just need to get the broad equity valuations right because the sector is automatically decided by the fund manager.

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Sector funds: These are for slightly experienced investors who can analyze different sectors. In this, you have funds like only private banks, PSU banks, IT, FMCG etc. This is again very high risk because you need to get the sector call right and on top of it you need to pick the right stocks within the sector.