Investing in thematic funds? Key factors you should keep in mind

Hemant Rustagi, Founder, Director, Wiseinvest, says “one of the key factors when you start looking at a sector or thematic fund is not to look at only the past performance. Obviously, going forward, you need to see which are the themes and sectors that are likely to do well. Some of these themes or sectors to go for are spaces where the government has been focusing.”

There’s a lot of data indicating investor interest towards a lot of thematic and sectoral funds, especially the ones which might get a boost after the election results and when the Budget comes up where we might be seeing a new policy framework or certain thrust in certain sectors. The data is showing increasing interest in sector thematic funds. Is it a one-off because of the election mode that we are in or are we also looking at a mature investor who feels diversifying towards thematic or sectoral funds is the right way to go after having the right core portfolio?
Hemant Rustagi: I think there are different reasons why investors usually invest in sectoral thematic funds. I mean, if you look at the current scenario, we have had a good run in the stock market and typically what happens when the markets are doing well is that these categories of fund, the sector fund and thematic fund, they tend to do very well so have some other segments of the market like mid and smallcap.

Typically when investors are looking at the past or recent performances, they look at the fund which is at the top of the chart and obviously the sector and thematic funds are right up there. Obviously, these sectors that do well keep on changing depending on where the government is focusing. For example, currently we have seen a good run in defence funds, we look at PSU equity funds, power and infrastructure funds. These are the sectors that the government has been focusing on and that is where investors have been putting in their money. So, yes, there is a particular time in the market when you will see a lot of interest from the investors in both sectoral as well as thematic funds.

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We have also seen a lot of theme based NFOs launching. We have seen a manufacturing NFO coming. We have also seen defence related NFOs coming. A lot of sector specific interest is being seen from the AMC side. What is the general trend in terms of sector allocation and thematic themes that you are seeing among investors?
Hemant Rustagi: One of the key factors when you start looking at a sector or thematic fund is not to look at only the past performance. Obviously, you need to see going forward which are the themes, which are the sectors that are likely to do well. Some of these themes or sectors that I mentioned about, is where the government has been focusing.

The key factor is that if we see the same government coming back once the election results are announced, the expectation is that their focus on these sectors and themes will continue. So, why past performance to look at because in the sector and thematic fund, the entry and exit timing is very, very important. You cannot be just looking at the past performance. You need to be very clear in terms of what kind of runway these sectors or these themes have going forward, then only you can do it.

You Might Also Like:It is very important for investors to realise that when you are thinking of investing in a sector or thematic fund, you need to look at where the growth is going to be and, of course, there are a couple of other factors that investors need to remember. If you are a new investor, if you just started investing, do not just look at the performance, understand the attendant risk of investing in these categories of funds. So, my recommendation always is that it is only those investors who have experience, who understand equity, who understand what are the risks related to these funds, should be looking at it and also, only a small portion of the portfolio should be invested.