Who should invest in Thematic Funds? Expert advice on allocation

Second, with a thematic fund, what you are offering is a differentiated product offering so it's easier to attract investor interest. Also, if you see the thematic funds that are coming in at this point of time, are more to do with what governments focus is on and what could play down in the next few years like green energy, manufacturing, innovation, these are all that government has been talking about since the last budget. The focus again was there on these topics in this Budget. So these are primarily the two three reasons where you see, I would say if there are 10 NFOs coming, 4-5 of them are in this thematic fund category.

Dalmia: Firstly, I think every fund house is trying to cater to what the customer needs. So if you talk to anyone, they will say we are trying to complete a portfolio. So today there are close to some around 17-18 themes and sectoral funds, are a subset of thematic funds. So the largest player there is ICICI Pru with close to like 18 funds and the second largest player SBI has only seven. So one is competition catching up. Second is, as the industry is maturing the customers today are getting more mature, they have been mutual fund investor for over five years. Now they want something different, they want to create alpha, they are tracking the markets more given that they are invested. So they are trying to find themes and that's the reason fund houses are coming with more and more options.

You are right fund house can come up with as many themes as possible. So today, as I said, ICICI Pru has the largest number of themes close to around 18 so you will see more and more of it. And finally with semi categorisation of funds some of the larger mutual funds have already exhausted the existing categories. They don't have an option but to come up with new themes so we see a lot of these themes coming out in the next few months and quarters.

Dalmia: First and foremost I feel that retail investors are the last to catch a theme. So they are already hearing about the theme, it's already played out and then they want to catch it. So one is, I would say there is a risk of volatility in these funds, because they are cyclical in nature. That's why they are a theme. So if you don't understand the theme, well, what is the right time, it can backfire.

The other more practical challenges are around the theme itself. So sometimes the theme is so narrow, like for example, all of us here today about EV, AI now if there is a fund which comes out saying, okay, we want to invest in AI. Now, how many companies do exist in that category? Secondly, sometimes, the fund houses will invest in a company, that has 2% of their revenue in AI, the rest is that software, so you may find them being pushed to investing in companies, that are not the right theme, or don't have all their revenues from that theme.

Secondly, the companies are illiquid and the universe of such companies is very low, so it becomes more volatile, less liquid, and those challenges are faced by the theme. So I think, those are the key challenges that a first-time investor or an investor should keep in mind while thinking of a particular theme.

Dalmia: I would say, look, thematic funds, SEBI has a Risk-o-meter, in that Risk-o-meter all these funds are generally very high risk. So first, it depends on your risk appetite. So if you have a higher risk appetite, that's the point you should think about getting into. Second is your tenure, because these are cyclical, you should be in it for a longer period of time, than saying, , I just want to play out a theme six months to a year. And third, I would say, as a rule of thumb, once you look at it 10 to 15%, and not more than that because it's not very easy to catch the theme at the right time. So, only if you are an aware investor with high risk, go for a 10 to 15% allocation to thematic.

Dalmia: I would say I have some personal biases, and I run a fintech company so I have this love for technology, I believe in the long term technology will always give superior returns. So, one is technology for sure. And second is I have a bias toward energy. So if I look at Adani, and everyone, I think energy is the next big thing so probably energy and technology will be the two NFOs.

Rajani: I will say, going in for a fund which is more business cycle theme in nature. Because what happens is, what a business cycle very simply does is investing in those companies, that are likely to go through a business cycle change, and therefore the profit upside could be on the higher side. It's more diversified in nature, as well as playing a certain theme on your portfolio. So you could end up getting the benefits of both worlds like Anand was saying IT could do well, it could also have certain IT companies in the portfolio, and it could have certain banks. So you are getting a kind of a blend of both worlds. So business cycle is what I would suggest as a theme if someone wants to participate.