Stay Ahead Of The Curve With Thematic Fund of Funds

It’s almost that time of the year when we reflect on the highs and lows of the year gone by, and make plans and resolutions for the brand-new year.

Let’s recap some of the big themes that influenced the Indian investment landscape in 2024 - inflation roaring back, the RBI choosing to not cut rates, the BJP-led NDA government winning a lower majority, IPOs garnering over Rs 1.5 lakh crore, GDP growth momentum slowing, strong retail flows countering FII selling, small and mid-caps outperforming their larger peers, the US economy dodging a recession, geopolitical conflicts intensifying and Donald Trump getting re-elected. Most of these were not widely expected. Yet, they did happen and they did impact stock markets in their own unique ways.

Looking ahead to 2025, if domestic inflation moderates, monetary policy could get accommodative. On the other hand, weather-related disruptions or imported inflation from a conflict-ridden, deglobalizing world could push the rate cuts further. It remains to be seen how Modi 3.0’s February Budget strikes a balance between firing up the Government spending cylinder of the slowing Indian economic engine, and aligning its fiscal deficit to lower targets. The Federal Reserve’s rate moves and the growth trajectory of the Chinese economy will determine the movement of foreign flows to India. The new US President’s policies on trade, geopolitical and climate fronts will have an impact on everything from exports and forex position to oil prices and domestic inflation.

As an interplay of macroeconomics, policy and geopolitics bear on financial markets, the key theme across the past and the future, it seems, is unpredictability. As such, how can one prepare their portfolio for the future?

First things first, in an unpredictable world, one needs to acknowledge the need for active investing - responding strategically and swiftly to the changing dynamics. As the economy ebbs and flows, certain parts of it thrive, and others struggle. To make the most of this phenomenon, one needs to tactically position their investment portfolio in sectors that could benefit from emerging macro-level themes. For example, rate cuts in developed countries could bode well for the IT sector or good monsoons and lower inflation could spur domestic consumption demand, a positive for Fast Moving Consumer Goods sector or higher government capex could benefit the infrastructure sector.

But this identification of lucrative sectors and themes requires extensive research and monitoring related to GDP growth, fiscal deficit, crude prices, currency movements, foreign flows, global and domestic interest rates, geopolitics etc. It also requires an understanding of correlation of these macros and sectoral performance.

As office goers and business owners with limited time and investment knowledge, one can outsource this job of research-backed, dynamic sectoral allocations to Thematic Fund of Funds. These mutual funds take exposure to sectors or themes that they are bullish on through sectoral funds such as, FMCG fund, Banking & Financial Services Fund, Infrastructure fund etc. By capitalizing on emerging macroeconomic and geopolitical trends, these funds offer a higher potential for returns. By timely exiting sectors which have either realized their potential or have a deteriorating outlook, they also minimize risk.

Thematic Fund of Funds are preferable to Do-It-Yourself sector investing as they relieve the investor from keeping track of day-to-day news, offer deeper diversification, eliminate inefficiencies caused by behavioural biases and lower tax incidence on intra-portfolio rebalancing.

Disclaimer: The Views are Personal and not a part of the Outlook Money Editorial Feature