Widely read:
Can you start by giving us an overview of why you think they are gaining popularity?
Sector and thematic funds are becoming popular because the market has been performing well. When you dissect the market and examine a specific segment, such as oil and gas or manufacturing, and craft a narrative around it, the investment case strengthens if that segment outperforms the broader market. Over the past few years, it has been relatively easy to convince investors that focusing on a narrower set of investments could yield significant returns, evidenced by their recent performance.
Another reason for the enthusiasm around these funds is the positive sentiment among investors. When investors see their portfolios grow in a rising market, they feel more confident. Marketing these funds becomes easier when framed as part of a compelling story—like the potential boom in electric vehicles or tourism—suggesting that certain sectors will prosper as India's economy grows.
While multi-cap or flexi-cap funds can also invest in these sectors/themes, thematic/sector funds make it easier to market a concentrated story. This storytelling aspect helps in attracting investors who can relate to these specific themes.
As the bull run continues, more such stories will be promoted, and investors will be attracted to them. Some of these thematic funds will have strong cases, while others might not. Only time will tell which ones succeed. That said, even if investors are thoughtlessly investing in some of these funds, allocating a part of their money is fine because thematic funds are eventually diversified vehicles.
Sectoral and thematic funds are cyclical and highly volatile. Can you elaborate on some of the risks associated with these funds as compared to the more diversified equity funds?
Thematic funds might offer more diversification than sector-specific funds. For example, a defence fund might invest in aviation, electronics, trucking, and cable companies, encompassing a broader range of industries. In contrast, a banking fund would only invest in banks. The primary appeal of such thematic funds often lies in their narratives, which may not always be grounded in hard facts but rather in emotional resonance that investors find relatable.
For instance, multinational corporation (MNC) funds were initially launched with the proposition that MNCs have superior corporate governance. Although this may not hold as strongly today, these businesses still enjoy advantages like access to technology and professional management.
Considering the excitement around these trending themes and sectors, what advice would you offer to investors? How can they mitigate the risks associated with these investments?
When investing in a thematic fund, investors should remember the early years of PSU and infrastructure funds. Initially, people made money, but thereafter, the wait was 10 years. Most investors can do without investing in these funds. For example, if you're investing your Rs 10,000 in a multi-cap fund, and that's all you can save and invest, you're fine; you don't need to chase these thematic investments. In fact, less is often more when it comes to investing. Being organised and knowledgeable about your investments is crucial.
There is a natural disadvantage when you invest in funds that are launched during a peak in popularity. These funds often try to capitalise on the momentum they are riding, and typically, this is a sign that it might be followed by a lean period as well because every part of the market is cyclical. It doesn't consistently rise in a smooth line.
Some of these thematic stories may pan out nicely over the next five, 10, or 15 years. However, are you missing out on the opportunities if you don't invest in them? No. By investing in funds where the fund manager has the flexibility to invest across various sectors, you are still likely to benefit.
Click here to register for the next episode of Investors' Hangout.
New episodes every Friday
