Difference between Thematic Funds and Sectoral Funds
Mutual funds provide you with a wide range of investment options, including opportunities to invest across the asset classes, market caps, sectors, and companies. While the mutual fund portfolio may be diversified based on the primary investment objective, the investors looking for having an investment exposure in a particular sector and theme may choose to invest in sectoral and thematic funds respectively.
Most people invest in mutual funds to seek potential returns at relatively low risk. However, this is not the case for all mutual funds. Thematic Funds and Sectoral Funds are two such funds that carry much higher risks compared to others. Is this the first time you’re hearing about these? Let’s dig deeper.
Sectoral funds:
As the name suggests, a sectoral fund is a type of mutual fund that aims to completely invest in a few specific sectors of the economy. This can be energy, information technology (IT), banking, FMCG, and so on.
Many businesses follow a cyclical pattern of ups and downs. While some sectors perform well, others falter during the same period. The main aim of these funds is to benefit from sectors that are performing well based on the investment objective of the scheme.
Thematic funds:
You can think of these as a fund which invests in a particular theme rather than sector– there are various investments but they all have a common theme. In other words, investments are made in stocks of different sectors based on a particular theme. Thus, investments made in thematic funds are broader and offers more diversification than sectoral funds.
Okay, what’s so special about these funds?
Sectoral funds are very attractive to some investors because they are capable of generating long term capital appreciation. Over the past decade, the CAGR (Compound Annual Growth Rate) return on mid and small-cap funds was 15%. In comparison, sectoral funds focusing on banking and FMCG delivered returns up to 18%.
So, what’s the risk?
Despite such capital appreciation, many investors hesitate to invest in sectoral funds. This is due to the risk that is inherently associated with these funds.
Since a sectoral fund invests heavily in only one or two sectors, the entire performance of the fund depends on the performance of these sectors. The fund offers potential results if the sector performs well. However, it can also take a big plunge if the sector does poorly.
So, should you consider these funds?
Investing in a sectoral fund may be quite tricky. Both Sectoral and Thematic funds don’t give much option for diversification, former more than the latter. Though both options carry high risk, with more room for diversification, Thematic funds are relatively less risky of the two and might be a better option if you are a new investor. It is best to dabble in them only if you have a firm knowledge of the sector and a big appetite for risk.
The bottom line:
Both these funds do expose an investor’s portfolio to a higher degree of risk compared to other schemes. However, this doesn’t mean that you are automatically staring at a loss by investing. If you understand the sector thoroughly and keep yourself updated with the business cycles in the sector, it is possible to enjoy potential returns on your investments.
Please note,
The views in the article/blog are personal and that of the author. The idea is to create awareness and for educational purpose and not intended to provide any product recommendations.
