In recent months, thematic funds have been attracting significant inflows. This surge in popularity can be attributed to several factors, including shifts in market dynamics and the unique advantages these funds offer.
To understand the current landscape and prospects, we spoke with Umeshkumar Mehta, Chief Investment Officer at SAMCO Mutual Fund, who provided insights into the reasons behind the growing interest in thematic funds and whether they remain a viable investment option.
Current opportunities in Indian equity markets
According to Mehta, the Indian equity markets have seen a rewarding phase for value-style investing over the past two to three years.
This is because of the elevated interest rates since the onset of the Russia-Ukraine war.
However, he notes that the quality segment, which underperformed during this period, now presents attractive opportunities with a sufficient margin of safety.
Growth sectors such as power, renewable and green energy, and engineering, procurement, and construction (EPC) are also showing strong demand tailwinds, driving profitability for companies within these industries.
Popularity and inflows in thematic funds
The thematic category has captured the attention of investors due to its ability to provide exposure to growth sectors and themes that are often underrepresented in major indices.
In the financial year 2024, thematic funds saw substantial interest from retail investors, driven by a notable rally in the broader markets.
Mehta explained that the relative outperformance of these broader markets, compared to benchmark indices, is largely due to sector allocation and concentration in a few sectors within the leading indices.
The rise in themes such as defence, railways, infrastructure, green energy, and public sector enterprises (PSEs) has drawn investors to funds targeting these emerging sectors in the Indian equity market.
More drivers of growth
Thematic funds distinguish themselves from traditional funds by offering exposure to emerging sectors that are often underrepresented in index-based funds.
As the Indian economy continues to expand, new sectors are emerging, diverging from historical market leaders.
This shift has driven the growth of thematic funds, providing investors with opportunities to tap into these new and dynamic sectors.
Trending categories in thematic funds
Mehta pointed out that thematic funds focusing on specific sectors or industries that have recently gained momentum are attracting significant traction.
This trend is partly due to a recency bias among investors, who are drawn to sectors that have performed well in the recent past.
However, he suggested a more balanced approach, recommending broader thematic fund categories such as Special Opportunities Funds or Business Cycle Funds.
"These sector-agnostic funds offer flexibility for fund managers to navigate challenging market conditions by moving out of underperforming sectors, thereby reducing sectoral risk and providing diversified exposure to various themes and sectors," Mehta told CNBC-TV18.com.
Investment considerations
While thematic funds have shown the potential to outperform benchmark indices, Mehta cautioned that they can also experience significant drawdowns during market downturns, especially if heavily allocated to specific industries facing challenges.
He advised investors to include thematic funds in their portfolios to gain exposure to emerging themes and sectors not typically covered by traditional funds.
"A sustainable approach to scheme selection should focus on funds with diverse stock selection strategies to mitigate sectoral risks and severe drawdowns," he said.
To understand the current landscape and prospects, we spoke with Umeshkumar Mehta, Chief Investment Officer at SAMCO Mutual Fund, who provided insights into the reasons behind the growing interest in thematic funds and whether they remain a viable investment option.
Current opportunities in Indian equity markets
According to Mehta, the Indian equity markets have seen a rewarding phase for value-style investing over the past two to three years.
This is because of the elevated interest rates since the onset of the Russia-Ukraine war.
However, he notes that the quality segment, which underperformed during this period, now presents attractive opportunities with a sufficient margin of safety.
Growth sectors such as power, renewable and green energy, and engineering, procurement, and construction (EPC) are also showing strong demand tailwinds, driving profitability for companies within these industries.
Popularity and inflows in thematic funds
The thematic category has captured the attention of investors due to its ability to provide exposure to growth sectors and themes that are often underrepresented in major indices.
In the financial year 2024, thematic funds saw substantial interest from retail investors, driven by a notable rally in the broader markets.
Mehta explained that the relative outperformance of these broader markets, compared to benchmark indices, is largely due to sector allocation and concentration in a few sectors within the leading indices.
The rise in themes such as defence, railways, infrastructure, green energy, and public sector enterprises (PSEs) has drawn investors to funds targeting these emerging sectors in the Indian equity market.
More drivers of growth
Thematic funds distinguish themselves from traditional funds by offering exposure to emerging sectors that are often underrepresented in index-based funds.
As the Indian economy continues to expand, new sectors are emerging, diverging from historical market leaders.
This shift has driven the growth of thematic funds, providing investors with opportunities to tap into these new and dynamic sectors.
Trending categories in thematic funds
Mehta pointed out that thematic funds focusing on specific sectors or industries that have recently gained momentum are attracting significant traction.
This trend is partly due to a recency bias among investors, who are drawn to sectors that have performed well in the recent past.
However, he suggested a more balanced approach, recommending broader thematic fund categories such as Special Opportunities Funds or Business Cycle Funds.
"These sector-agnostic funds offer flexibility for fund managers to navigate challenging market conditions by moving out of underperforming sectors, thereby reducing sectoral risk and providing diversified exposure to various themes and sectors," Mehta told CNBC-TV18.com.
Investment considerations
While thematic funds have shown the potential to outperform benchmark indices, Mehta cautioned that they can also experience significant drawdowns during market downturns, especially if heavily allocated to specific industries facing challenges.
He advised investors to include thematic funds in their portfolios to gain exposure to emerging themes and sectors not typically covered by traditional funds.
"A sustainable approach to scheme selection should focus on funds with diverse stock selection strategies to mitigate sectoral risks and severe drawdowns," he said.
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