ET In The Classroom: Using thematic funds to generate Alpha

economictimes.indiatimes.com:

Investors are increasingly allocating more money to thematic funds, a category with 161 schemes having assets under management of Rs 3.06 lakh crore as of April.

WHAT ARE THEMATIC FUNDS? Thematic funds are a category of equity funds which invest at least 80% of total assets in stocks of a particular theme. Some popular themes launched by fund houses in the last few years are public sector undertakings (PSU), infrastructure, MNC, business cycle, and manufacturing funds. For example, a PSU fund has a portfolio of PSU stocks like NTPC, Power Grid, SBI, HPCL, Hindustan Aeronautics, Bharat Electronics etc. A manufacturing fund will own companies in sectors like capital goods, engineering, cement, materials etc and exclude sectors like IT and core banking.

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WHERE DO THEMATIC FUNDS STAND IN THE RISK MATRIX? Financial planners point out that thematic funds carry higher risk and reward. Unlike diversified equity funds that are broad-based and can invest across sectors, thematic funds invest in a narrow range of stocks and hence carry high concentration risk. However, they are far more diversified than sectoral funds like IT or pharma and carry lower risk than them. If you invest at a time when the economy works in favour of the underlying companies then these themes could give you high returns. However, any sudden adverse development in the economy which is not anticipated could impact companies in the portfolio leading