Should you invest in ‘new-age' thematic funds?



  • Thematic funds lack diversification and are highly susceptible to market movements

To attract investors looking for the next big bet, mutual fund (MF) houses have been lining up new generation thematic schemes that provide opportunities in areas such as blockchain, electric transportation, mobility, and artificial intelligence, among others. 

For instance, Navi MF has applied for a fund based on the internet of things, metaverse, and electric vehicles.  IDFC MF is looking to launch a mobility-based scheme, while Aditya Birla Sun Life MF plans to launch a blockchain and digital assets fund. Nippon India MF has filed for one based on artificial intelligence. 

These funds, if approved by market regulator, the Securities and Exchange Board of India (Sebi), would have most of its investments in overseas companies. 

However, as of now, overseas MFs have been barred from accepting fresh money since the industry limit of $7 billion has been reached. Market observers expect the limit to be raised soon. However, it is unclear whether Sebi will allow the launch of blockchain or crypto-focused funds in the absence of regulatory clarity in India in these areas.

Separately, companies have also launched new-age India-focused funds. These include the ICICI Prudential Housing Opportunities Fund, which invests in companies  expected to benefit from the growth in housing theme.   HDFC MF has filed for India’s first defence fund. 

While most of these opportunities were not available to investors before, the question is, should investors have these schemes in their portfolios? 

Financial advisors are unequivocal in their views that small investors should stay away from new-age thematic funds. 

“For nine out of 10, who are not savvy investors, none of these are really required. All you need is diversification across markets and some geographic diversification," said Kirtan Shah, founder and CEO, Credence Wealth Advisors. 

Tarun Birani, founder, of TBNG Capital and a Sebi-registered investment adviser, suggests that thematic plays should be taken in the higher risk bucket than a normal diversified fund. 

“Thematic funds should be taken more like a tactical bet in your portfolio. And these funds are advisable for somebody who is already in the market for a long period of time, understands the ups and downs and has seen some cycles in the market," Birani said. 

Experts say that the key risk of investing in a thematic fund is the lack of diversification. Another major risk to these funds is that they are highly susceptible to market movements. For example, global tech stocks slumped 40-50% over the past few months in line with weakness in broader markets. 

Investors should also note that thematic funds also have government, geopolitical and geographical risks. 

“Investors might have to dedicate more time to thematic funds compared with even small-cap funds. Further, let’s say you invest 5% of your portfolio in a specific theme, and the theme outperforms your other funds by even 10%, your overall portfolio is only going to get impacted by 0.5% but there is no end to the risk," said Shah. 

However, these themes may work for savvy investors. 

According to Shah, savvy investors can have thematic investments but their share has to be a slightly larger part of the portfolio for them to make any meaningful impact. 

Birani feels that tech remains a durable theme over a long period. “New-age internet companies, the way the business disruption is happening across the sector. That is one area where definitely I feel it’s a long-term structural theme. Also, there is a lot of merit to look at the EV theme. However, as we don’t have much credible companies in India, we have to look at global companies," he added. 

Mint View 

An average investor does not have the tendency to track investments constantly. Therefore, it is better for small investors to stick to a pure play diversified schemes, where an experienced fund manager has the power to identify themes based on merit. However, savvy investors who have the ability to take tactical calls on their portfolios can look at having  5-10% of their exposure to these new-age themes.

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