Thematic funds are considered riskier than diversified funds

Investors might need to time their entry and exit from such funds since the movement of NAV of these funds can be cyclical in keeping with economic and industry patterns


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What is a thematic fund? I’ve been investing Rs.10,000 for the past 15 months in three systematic investment plans (SIPs)—Rs.5,000 in HDFC Top 200, Rs.3,000 in ICICI Prudential Tax Plan and Rs.2,000 in UTI Mid Cap. I want to invest Rs.7,000 more. Which schemes should I select?

—Kavish Mitra

Every MF has an investment mandate that tells the fund manager how to manage the investors’ monies and where to invest. Equity MFs that invest in the stock market often have mandates that instruct the fund manager which segment of the market to invest in.

Thematic funds are those where the mandate specifies a particular sector or a handful of sectors from where they can pick stocks. For example, an infrastructure themed fund can pick stocks from sectors such as construction, engineering, manufacturing, telecommunications, among others. Such funds give an investor a focused exposure to a particular theme within a portfolio. These funds should be considered riskier than regular diversified funds or even a fund that invests in a localised manner within particular market segments. Investors might need to time their entry and exit from such funds since the movement of net asset value (NAV) of these funds can be cyclical in keeping with economic and industry patterns.

Coming to your portfolio, you can afford to have a small allocation to a thematic fund. A fund such as Kotak Infrastructure and Economic Reform fund would be good for a Rs.2,000 allocation. The remaining Rs.5,000 can be split between diversified funds such as Birla Sun life Frontline Equity fund and Mirae Asset India Opportunities fund. With this portfolio, you’ll have six funds (about the maximum advisable in a single portfolio).

How does a systematic withdrawal plan (SWP) work?

—Xavier James

SWP is the opposite of SIP. With SIP, a person invests a certain amount of money on a regular basis; with SWP, an investor withdraws a certain amount of money on a regular basis. An investor needs to build an investment in a fund before opting for SWP. This can be built either using a lump sum or through SIP. Once a corpus is thus built, an investor can specify that she needs a particular sum withdrawn on a particular date every month. Do remember that if the corpus in a scheme is built through an SIP, then that has to be stopped before an SWP can be started on the same scheme.

SWP is a good option for regular income as it provides certainty of amount and can be employed with any type of MF. Another way of generating regular income from MFs is to use the dividend option, but that mostly works with certain classes of debt funds. SWP also ensures that an investor averages the cost of exit just as they could average their cost of investment using SIP. This means that the investor does not make big withdrawals at a particular market level that could potentially turn out to be a timing error.

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