Thematic funds have gained the attention of investors, of late. Amid the volatility in the stock market, the emerging trends in certain mega trends around electric vehicles, artificial intelligence have found favour with investors keen to explore these emerging futuristic themes. A recent discussion with Umesh Kumar Dalia, Head – ETF Sales, Mirae Asset Investment Managers (India) Pvt. Ltd as part of Outlook Money’s ‘Investment Made Easy’ webinar series threw some light on the strategy one should adopt for investing in thematic funds. Dalia was in conversation with Sutirtha Sanyal, Assistant Editor, Outlook Money.
Here are some edited excerpts from the discussion
What is thematic investing?
Thematic investing focusses on long-term structural trends, rather than focussing on a single sector or companies. It enables investors to get returns through potential opportunities created by various economic and technological changes. The best thing about thematic investment is that it allows investors to personalise their portfolio through investments that are aligned with their individual risks and expectations, and which are geared towards selected trends.
The basic characteristic of thematic investing includes trends, sector independence, and security selection. It identifies companies by their exposure to different target segments and themes. One way to define thematic investing is investing for your future by investing in the future.
In the last five years, thematic exchange-traded funds (ETFs) have grown by three-and-a-half times in terms of their assets and popularity, and they are expected to grow further in the years to come.
How are they different from market-caps and sector funds?
Thematic funds intend to capitalise on a trend and invest in a theme across all sectors. They are less concentrated as compared to sector funds, but are more concentrated when we compared them to market-cap based funds. For example, let’s take the example of an electric vehicle fund that invests in the entire ecosystem of companies involved in the supply chain of EV production, including automakers, component suppliers, raw material suppliers, battery providers, mining companies and etc. When we talk of electric vehicles as a theme, it covers all the companies involved right from the mining to the final production and sales.
An auto-based index fund, on the other hand, is a sector fund, which basically invests into automobile OEMs and the ancillaries. From a comparison perspective, the themes cater a bigger universe than a sector fund.
Which are the more popular thematic funds?
The thematic landscape is a bit limited in India. So, investors can consider investing in the existing themes around housing, infrastructure, and so on, but they could also consider investing in the next big emerging themes and mega trends around ESG, artificial intelligence, electric vehicles, and the like. So, international thematic funds can be one of the suitable avenues from which investors can take the advantage of the opportunity provided by global megatrends.
What are the kinds of risks associated with thematic investments?
Both actively-managed and passive funds have their own set of inherent risks, and the returns differ significantly. There are broad-based themes like ESG that might give you stable returns, while themes like robotics and AI, which are expected to scale in future, might be able to generate higher returns, but would have a higher risk proposition, too.
Thematic funds also have a higher concentration risk than market cap-based funds. Their performance can also be cyclical at times. They are ideal for investors looking for long-term strategic allocation to structurally strong themes.
Depending on their risk profile and investment objective, one can consider allocating 10 per cent of one’s investment portfolio in thematic funds as part of a satellite portfolio, with the core portfolio investing in broad-based indices, such as Nifty 50.
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