Unprecedented Growth In Thematic Funds From Past Few Years: Are They the Future of High Yield Investing?

Thematic Funds vs. Traditional Mutual Funds

 Thematic Funds funds invest in companies that follow a specific trend or theme. Thematic mutual funds could be a good option if you think a particular theme will do well. Thematic Funds can offer high returns if the theme performs well but carries higher risk because these funds focus on fewer companies.

Mutual funds come in different types like equity, debt or hybrid and invest based on factors like company size or sector. Mutual funds usually provide more diversification, spreading investments across various sectors and assets.

The risk and return of mutual funds vary. Equity funds offer higher returns with more risk, while debt funds are safer but with lower returns. Thematic funds are riskier due to their narrow focus while mutual funds can provide a more balanced risk depending on their type.

Expert Insights: What’s Driving This Surge?

 Thematic funds have been gaining a lot of attention in the mutual fund market lately. As per the data available, these funds which focus on specific themes or sectors like tourism, defense or oil and gas have seen a surge in investments attracting anywhere from ₹10,000 crore to ₹16,000 crore every month. Asset Management Companies (AMCs) are launching more of these funds because they've already filled up their offerings of broader, diversified funds.

The space for diversified funds is crowded, AMCs are turning to thematic, sectoral and passive funds to grow their assets. These funds have caught the eye of investors by delivering impressive returns some as high as 141% in just one year.

A significant portion about 33% of all investments in equity mutual funds during the first three months of the financial year 2024-25 went into these thematic and sectoral funds. Many investors tend to pick funds based on their recent performance, so when one sector or theme does really well in the short term it naturally attracts more money. This leads investors to chase performance, jumping into funds that focus on the sectors doing well at the time.

 Sectoral Performance: Which Themes Are Leading the Charge?

As India moves toward becoming a major economic player, new trends are emerging in the stock market offering great opportunities for investors. These trends are driven by a mix of new technologies, government actions, shifting consumer habits and global developments.

 Digital Transformation: Tech Driven Growth

In recent years, technology has become a major driver of growth across many sectors in India. Digital platforms like payment systems, online shopping and fintech are making life easier for consumers and expanding access to financial services due to increased internet and smartphone use. The government’s push towards a cashless economy is also speeding up this digital shift.

Beyond consumer services, businesses are adopting technologies like cloud computing, AI and data analytics to improve how they operate.

Green Energy and Sustainable Investments

 Sustainability is now a big theme for investors both globally and in India. The government aims to reach net zero carbon emissions by 2070, sparking investments in renewable energy like solar and wind. Innovations in energy storage, electric vehicles and clean technologies are also drawing attention. Investors are increasingly looking for opportunities that have positive environmental and social impacts.

 Healthcare and Biotech

The pandemic highlighted the importance of healthcare leading to a wave of innovation. New investment opportunities are emerging in pharmaceuticals, diagnostics, medical devices and telemedicine. Biotechnology, especially companies working on new drugs and therapies is attracting significant investor interest.

Premiumization and Aspirational Spending

 Indian consumers are changing with rising incomes and urbanization. People are now more likely to spend on higher quality, branded products and services instead of budget options. This trend is evident in sectors like consumer goods, automobiles, real estate and financial services.

Infrastructure and Real Estate Growth

  The government’s focus on developing infrastructure like roads, railways, airports and smart cities is creating new opportunities in construction and real estate. After facing challenges, the real estate sector is bouncing back, due to reforms and affordable housing schemes. Urbanization and smart city projects are expected to drive further growth.

Global Supply Chain Realignment

Pandemic disrupted global supply chains leading companies to rethink where they manufacture and source products. India with its Make in India initiative and production incentives is becoming a preferred manufacturing hub for industries like electronics, pharmaceuticals and textiles. This shift is also boosting logistics, warehousing and industrial automation.

Future of Thematic Funds: High Yield or High Risk?

Future of thematic funds could be seen as both high yield and high risk depending on various factors. Thematic funds focus on specific trends, sectors or themes such as technology, renewable energy, healthcare or consumer behavior. These funds offer investors a chance to capitalize on niche areas that might outperform the broader market. However, the targeted nature of these funds also makes them more susceptible to sector specific risks and volatility. Their future is a bit of a mixed bag, there's potential for both high rewards and high risks.

High Yield Possibilities

• These funds tap into emerging trends that could grow over time like artificial intelligence, clean energy or biotech. If these sectors do well thematic funds could generate strong returns.
• If you invest in a theme early before it becomes mainstream you could see big gains as it grows and more people invest in it.
• Some themes like clean energy have government backing or strong consumer interest which can drive growth even faster.

High Risk Factors

• These funds often put all their eggs in one basket. If the specific trend or industry struggles the fund could lose value quickly.
• Because they focus on emerging sectors the prices can be more volatile. A sudden downturn in the market can hit these funds harder than more diversified investments.
• Some themes get a lot of hype and when investor enthusiasm drops, so do the fund’s returns.

Thematic funds might be better for long term investors who can wait for the trends to mature rather than those looking for short term gains. One strategy is to invest in thematic funds along with broader funds to reduce the risk that comes with focusing on just one trend or industry.

Conclusion

Thematic funds have been gaining popularity quickly, attracting lots of investors due to their potential for high returns by focusing on specific trends like technology and green energy. While these finds can offer exciting growth opportunities they also come with higher risks since they invest in fewer companies. This makes them more vulnerable to market changes. For long term investors who believe in these themes, thematic funds can be a great choice especially if they invest early. However, it's smart to combine them with more diversified funds to help reduce the risks that come with focusing on just one area.

To continue learning about mutual funds and explore more related topics, you can find additional information.

Disclaimer: This article is part of sponsored content programme. The Tribune is not responsible for the content including the data in the text and has no role in its selection.