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Home / Money / Calculators /  Limit thematic fund to 20% of a diversified portfolio

I have a diversified mutual fund portfolio. I have systematic investment plans (SIPs) in two equity large-cap funds and two mid- and small-cap funds. I even have a lump sum amount invested in a monthly income plan (MIP). My salary has increased and I want to invest that money; some of it in a thematic fund. But I don’t know which sector fund I should invest in. Would a thematic fund be suitable for me? If yes, which sector should I look at? My time horizon is seven years?

—Xavier D’Souza

Investing in a thematic fund, as an additional fund in a well-diversified portfolio is definitely not a bad idea. Since you already have full exposure to the broad market in the form of two large-cap funds and two mid- and small-cap funds, adding a thematic fund could give your portfolio returns an extra boost, especially considering that you are investing with a reasonably long-term time horizon in mind.

However, you would need to keep one thing in mind, and that is about the percentage of allocation you do towards this fund. You have said that you want to invest more money due to a rise in salary. I am assuming that you want to invest in this new fund systematically by increasing your monthly contribution to your portfolio.

If that is the case, please make sure that the amount you invest in the thematic fund comes to not more than 10-20% of your overall monthly SIP contribution. For example, if you are investing 2,000 each in the four existing funds, and you want to add another 2,000, then you can invest all this new money in the thematic fund since. In the end, you will be investing 20% (2,000 out of 10,000) in the new fund. On the other hand, if you are investing 1,000 in each fund today (totalling 4,000) and you want to add another 4,000 to the thematic fund, then the tilt towards the thematic fund would be too much. It would be better to add 600 to each of your existing funds, and then allocate 1,600 to the new fund, to achieve a similar ratio.

The main point of this argument is that once you are done allocating money across your existing schemes and the new thematic fund, the percentage to the new fund should not exceed 20% of the total portfolio.

Regarding the actual theme and fund to choose, it would be a good idea to go with a fund that seeks to take advantage of the ongoing economic reforms and the expected infrastructure spending. Kotak Infrastructure and Economic Reform fund would be a good choice to add to your portfolio.

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