Your Money | Be ready to ride out multiple business cycles for higher returns

financialexpress.com:

By Shreyash Devalkar

Thematic funds are a category of mutual funds that focus on a specific theme or sector rather than a broader market index. Unlike diversified equity funds that invest across various sectors, thematic funds are designed to capitalise on emerging trends, ideas, or industries within a particular sector. They align investments with emerging trends and offer a focused yet diversified approach to wealth creation.

Since these funds gain exposure to a single sector, they feature under the ‘very high risk’ category on the riskometer. It is imperative to note that not all thematic funds will effectively profit from the growth of their targeted trend, making it even more crucial that investors carefully assess their risk appetite. These funds can be a part of an investor’s satellite portfolio, and not the core one. Also, as markets face volatility, the probability that the fund too faces volatility is relatively high. Therefore, those who are willing to ride out multiple business cycles and invest in the long run, can consider investing in them.

When investing in a thematic fund, investors must look at themes that have the potential to scale up in the future to capitalise on the inevitable long-term opportunity. It may so happen that valuations are not entirely reflective of the trends in the current environment. The key is to identify such trends, a task easier said than done. Investors must also note that the relationship between stock returns and earnings growth is usually indeterminate. Therefore, one must look at growth relative to the market’s expectations. This requires the investor to understand what the market is currently pricing in, a deep understanding of the macro story, and how the landscape