In any economy there are certain sectors that perform better than others due to favourable government policies and incentives available to them at a particular point of time, as also the strong internal and global demand for their products/ services. Investment in these sectors, when undertaken well in advance should reap benefits of growth in such sectors.
Hence, sector and thematic funds are perceived as funds with prospects of high growth with possibly medium to high risk. These funds provide clarity to the fund manager in choosing investments and also enables him/her to have a more focused approach in portfolio management. These funds also provides risk diversification by way of investments in several stocks of the same universe in a cost-effective manner. These schemes aim is to provide investors growth of capital over a period of time as well as to make periodical distribution of income from investment in stocks of respective sectors of the economy.
Sectoral funds are a mutual fund schemes that invest in only a specific sector. For example, an auto sector fund will invest in only shares of automobile and related companies, a banking sector fund will invest in only shares of banking companies. IT sector funds will invest in only shares of IT related companies. An FMCG sector fund will invest in only shares of FMCG and related companies.
As Sector funds invest in only a specific sector it suffers from concentration risk. If that sector does poorly, then the scheme returns are seriously affected and investor also may lose partial capital.
Sectoral funds are benchmarked to sectoral indices like BSE Bankex, BSE FMCG Index, and CNX Infrastructure Index.
Investors who are less risk averse can invest in sector funds. An investor need to make the right sector choices, before venturing into these sector funds.
Focus on stocks within a certain business or industry, high volatility than the overall stock market, concentrated holdings are the risk characteristics of sector funds.
Ideally an investor in sector funds should not have exposure to many different sectors. Investing in more sectors than that, would be equivalent to having a Diversified portfolio of sector funds. The investor may as well invest in a Diversified fund.
Thematic funds are mutual funds that invest in line with an investment theme. The investment strategy is more broad-based than a sectoral fund but narrower than a diversified equity fund. For example, an infrastructure thematic fund invest in shares of companies that are into infrastructure, construction, cement, steel, telecom, power, infrastructure toll-collection, etc.
Thematic funds are a variation of sector funds. Here the investment is as per a theme Transport and Logistics. Multiple sectors, such as Automobile, Auto ancillary, Tyre, Shipping, Logistics and related are connected to this theme. Thus, a thematic fund tends to have wider exposure than a sector fund, but a narrower exposure than a diversified fund. Therefore, thematic funds are less risky than sector funds, but riskier than diversified equity funds. Other themes can include PSU, Export and other services. Energy, MNC, Financial Services, Entertainment etc.
Some investors are more comfortable identifying promising investment themes (for example, infrastructure), rather than specific sectors (like cement, steel etc.). Such investors can decide on investment themes they would like to buy.
Thematic Fund can allocate only up to ten percent of its assets in the equity shares of a single stock.
Who can invest?
Thematic funds are for investors who are well versed with market behaviour and are hence in a better position to take thematic investments. Thematic funds benchmarking may not give a definite idea. But to get a picture of how they are doing with respect to the market, they are often benchmarked against broader indices such as BSE 200 or BSE 500 or S&P CNX Nifty or CNX 100 or S&P CNX 500
To understand Thematic fund below given is Transportation thematic fund.