What risk do these funds carry?
Risk and reward both could be higher in thematic funds. Unlike large-cap, flexi-cap and multi-cap funds that invest in a diversified portfolio of stocks, thematic funds invest in a narrow range of stocks and hence carry high concentration risk. However, thematic funds are far more diversified than sectoral funds like IT or pharma and hence carry lower risk than them. If you invest at a time when the economy works in favour of the underlying companies then these schemes could give you high returns. However, any sudden adverse development in the economy could impact companies in the portfolio, leading to even a loss in the near term. Many a time, these themes may take longer to play out, while the broader market may continue to move up, thereby leading to underperformance for a longer time.Who should consider a thematic fund?
Financial planners suggest first-time investors should avoid thematic funds and start with diversified equity mutual funds. Once your core portfolio is built and you are looking to generate alpha and understand the risks associated with it, you could opt for a thematic fund. Investors could make an allocation to a thematic fund as a satellite portfolio with the core portfolio in a mix of diversified equity mutual fund schemes.
How should you invest in such a theme?
Like for any equity-oriented scheme, investors can make both lump sum and systematic investments in these schemes. If investors believe there are certain events that will unfold over a year which will help the theme, they could use a staggered approach to invest while if they feel the theme can perform anytime, they can opt for one-time investments.
