The biggest advantage of thematic investing is that it lets investors capitalize on opportunities that have cropped up due to geopolitical, technological, or macroeconomic factors. Instead of specific industries or sectors, long-term trends form the crux of thematic funds and they may be spread across various sectors. For example, environmental social and governance (ESG) as a theme may involve investing in stocks of companies of different sectors such as technology, energy, pharmaceuticals, etc.

The realm of thematic investing is drawing more and more enthusiasts primarily because it enables them to spot future drivers of return from equity investments. In the long run, this can materialize in the form of chances wherein investors can race ahead of traditional broad indexes that capture market movements in an overarching fashion. Many also consider it an innovative way to participate in the growth stories of industries that have the power to disrupt societies and economies.

However, thematic investing can be a tricky game to ace, especially for newbie investors. Here is a list of a few dos and don’ts that you should keep in mind when investing in thematic funds:

1) Do not get carried away by fads: Is the narrative behind the theme compelling enough? Is it truly a growth story or something whipped up by hype? Is there enough data to lend legitimacy to the theme’s prospects? Before picking a thematic fund, do not forget to seek the answers to these questions. Often, a theme that sounds too good to be true may actually be a fad that becomes quicksand for you.

2) Do not get too caught up in trying to be early: Yes, the disruptor you read about in the newspaper may have a brilliant future. At times, the urge to be one of the first few to identify a great theme may make you oblivious to the fact that a company may currently be creating waves with its offerings but its current position is no guarantee that it will not be obfuscated to oblivion by its competitors in the future. It is also imperative to consider the existing market scenarios (if at all there is a market for the product or service in question) and the prospects pertaining to the chosen theme.

3) Do not choose a highly restrictive theme: Thematic funds are less concentrated than sector funds but more concentrated than diversified equity funds. Choosing a theme where the array of stocks is limited to very few sectors or industries can compound the risk element and this may make it extra sensitive to volatility. No matter how confident you may feel about a particular theme, do not forget to gauge how the addition of a thematic fund may impact the overall risk levels of your portfolio.

4) Do your research about the theme: Thematic funds are better suited for investors who command a certain degree of familiarity with market dynamics. Owing to the risks, a choice of a thematic fund should be preceded by a thorough understanding of the theme and the opportunities ahead for that theme. The timing of the investment would also matter because it makes little sense to ride on a theme when it is well past its prime.

5) Do take a closer look at fund holdings: The thematic route also requires investors to have an idea of the liquidity of the fund. The exit timing matters and investors have to exercise a certain degree of caution. As such investors should look directly at fund holdings to gauge whether they would face any difficulties should they have to sell their holdings at short notice. Scrutiny of factors like market capitalization, and trading volumes of the stocks, especially for funds with a high concentration of small and micro caps should be considered.

6) Do have patience: The thematic investment game is for the long haul. Investors who want to make the most of the dynamics of thematic investing need to have the patience to stay put with a long-term investment horizon. An approach where short-term goals are sought after can lead to losses because the themes are essentially chosen based on long-term growth prospects. Pulling out your investments in response to sudden triggers that affect the chosen theme should be avoided.

Disclaimer: An Investor Education and Awareness Initiative by Mirae Asset Mutual Fund

All Mutual Fund investors have to go through a one-time KYC (Know Your Customer) process. Investors should deal only with Registered Mutual Funds (RMF). For further information on KYC, RMFs and procedure to lodge a complaint in case of any grievance, you may refer the Knowledge Centre section available on the website of Mirae Asset Mutual Fund

Mutual fund investments are subject to market risks, read all scheme related documents carefully.


IE Disclaimer

An investor education initiative by Mirae Asset Mutual Fund.

For information KYC process, Registered Mutual Funds and the procedure to lodge a complaint, refer knowledge centre section available on the website of Mirae Asset Mutal Fund.

Mutual fund investments are subject to market risks, read all scheme related documents carefully.