Is Thematic Passive Investing For You?

Thematic investing is a growing trend within the passive investing landscape. In general, thematic investing has seen increased traction in India. According to a report by the Association of Mutual Funds in India (AMFI), thematic and sectoral funds collectively accounted for over ₹1.5 lakh crore in assets under management (AUM) as of 2023, representing a significant rise from ₹70,000 crore in 2018.

Unlike traditional index investing, which covers broad market indices like the Nifty 50 or Sensex, thematic passive investments focus on particular trends, industries, or economic shifts. Some of the popular thematic indices in India are Nifty IT, Nifty India Consumption, Nifty Manufacturing, Nifty Infrastructure and Nifty Energy.

What You Should Know

Thematic ETFs or index funds track indices that represent specific themes. For instance, a “technology ETF” might track an index composed of major tech companies in India, while a “renewable energy fund” could focus on companies involved in solar and wind energy projects.

Also, there are passive funds that track bond indices, providing exposure to a diversified pool of fixed-income securities such as government bonds, corporate bonds, and other debt instruments. These funds usually track indices such as the Nifty 10 Year Benchmark G-Sec Index or the CRISIL Composite Bond Fund Index.

Benefits And Risks: Thematic indices can offer greater returns compared to broad market indices if an investor can accurately identify the onset of a theme. However, these funds can come with higher volatility compared to broader index funds, as they are concentrated in specific sectors. For example, Nifty India Defence has given 100% return in the past year, but has fallen 16% in the last 3 months—5 times more than the fall in Nifty 50.

Additionally, themes may fall out of favour, resulting in steep price correction. Many themes underperform for prolonged periods. Further, accurately identifying industry-specific themes is highly challenging even for the most seasoned investors. One should be aware that hype around thematic funds tend to peak along with the peak in a bull run.

Conclusion

Passive investing is an excellent strategy for those who value simplicity, cost-efficiency, and long-term gains. However, it’s essential to be aware of its limitations, such as the inability to outperform the market or avoid downturns. Investors must also be aware of the nature of thematic investing, and not get carried away by recent performance.

Thematic indices must never constitute the majority of the equity portfolio, because investment in industry-specific themes are not something you “buy and forget”. Consider allocating only 5-10% of your portfolio. Ideally, seek the advice of SEBI-registered financial advisors before investing.

Disclaimer: Mutual Fund Investments are subject to market risks, read all scheme documents carefully.  This article provides general information and should not be considered financial advice. Consulting with a qualified professional is recommended to assess your individual circumstances and make appropriate financial decisions.

Disclaimer: This content is produced by Shyam Sekhar of Ithought and is not authored by the Outlook Money editorial team.