Investing in mutual funds can be an excellent way for individuals to grow their wealth over time, especially for beginners. However, choosing the right type of mutual fund can be tricky, especially when it comes to more niche options like thematic mutual funds. These funds focus on specific themes or sectors and offer targeted exposure, making them appealing for investors who have a high level of conviction about particular industries or trends. But are thematic mutual funds the right bet for new investors? In this article, we will explore what thematic funds are, their pros and cons, and how factors like NAV in mutual fund investments should be considered when making a decision.
What are thematic mutual funds?
Thematic mutual funds are equity-oriented funds that focus on investing in companies related to a specific theme, sector, or trend. Unlike diversified funds, which invest across multiple sectors, thematic funds concentrate their investments on a particular segment of the economy. These themes could range from technology, healthcare, and infrastructure, to green energy or consumption.
For example, a thematic fund based on the technology sector would only invest in companies within the tech industry, such as software companies, hardware manufacturers, and IT service providers. While this focus allows investors to capture growth in a specific area, it also means that these funds are more vulnerable to sector-specific risks.
How does NAV work in thematic mutual funds?
NAV (Net Asset Value) is a key term when evaluating mutual funds. It refers to the per-unit price of a mutual fund and is calculated by dividing the total value of the fund’s assets (less liabilities) by the number of units outstanding. Essentially, it tells investors the current market value of one unit of the fund.
When investing in thematic mutual funds, tracking the NAV in mutual fund investments is essential for understanding the fund’s performance. An increasing NAV indicates that the fund’s investments are performing well, while a declining NAV suggests a decrease in the value of the fund’s holdings.
For new investors, NAV can provide a snapshot of the fund’s performance, but it should not be the sole factor for decision-making. It is crucial to also consider other aspects such as the fund’s theme, potential growth, and associated risks.
Advantages of thematic mutual funds
1. High growth potential
Thematic mutual funds offer investors the opportunity to capitalise on emerging trends or sectors expected to outperform the broader market. For example, if you believe that renewable energy will drive future growth, investing in a green energy thematic fund could allow you to benefit from the sector’s expansion.
Themes like technology, healthcare, and digital consumption have been growth drivers in recent years. As these sectors continue to evolve, thematic funds focusing on them can generate significant returns for investors.
2. Focused investment strategy
One of the key advantages of thematic mutual funds is their focused investment strategy. By concentrating investments on a particular theme, these funds can deliver substantial returns if that theme performs well. Unlike diversified funds, which spread their investments across various sectors, thematic funds make concentrated bets, which can lead to outsized gains when the chosen theme is in favour.
3. Thematic investing aligns with personal interests
Many investors prefer thematic funds because they align with their personal beliefs or interests. For example, individuals concerned about environmental issues may find green energy funds appealing, while others may be drawn to funds focused on technology or healthcare innovation. This alignment between personal values and investment choices can make thematic funds more attractive to certain investors.
4. Diversification within the theme
Although thematic funds are focused on a single theme, they can still offer some level of diversification within that theme. For example, a technology thematic fund might invest in a wide range of companies within the tech sector, from software providers to hardware manufacturers. This allows investors to capture growth from multiple players within a specific industry, rather than relying on the performance of just one company.
Disadvantages of thematic mutual funds for new investors
1. High risk due to sector concentration
While thematic funds offer growth potential, they also come with higher risk due to their concentrated exposure to a single theme or sector. If that sector underperforms, the entire fund may suffer. For instance, if you invest in a healthcare-themed fund and there is a regulatory change that negatively impacts the healthcare industry, the fund’s performance could drop significantly.
For new investors who may not be familiar with market volatility, this concentrated risk can be challenging to manage. A more diversified fund might offer better protection against downside risks, especially in volatile markets.
2. Requires deep knowledge of the theme
Investing in thematic mutual funds often requires a good understanding of the specific sector or trend. New investors may not have the experience or knowledge necessary to evaluate whether a particular theme is likely to perform well in the future. Without a strong grasp of the industry’s prospects, new investors could end up making less informed investment decisions.
3. Timing the market can be difficult
The success of thematic mutual funds largely depends on timing. Entering a thematic fund at the right moment, when the sector is poised for growth, can yield high returns. However, if the theme has already reached its peak or is facing temporary challenges, investors may experience losses. For beginners, timing the market can be difficult, and thematic funds may not offer the long-term stability that other diversified funds provide.
4. Less diversification
By design, thematic funds focus on a particular theme, which limits diversification. While they may invest in multiple companies within a sector, they lack the broad exposure provided by diversified mutual funds. This lack of diversification increases the risk associated with sector-specific downturns, making thematic funds less suitable for conservative investors or those with a low-risk tolerance.
Are thematic mutual funds right for new investors?
For new investors, thematic mutual funds may not always be the best option due to their higher risk and sector-specific focus. Here are a few considerations for beginners:
- Risk tolerance: If you are a new investor with a high-risk tolerance and strong conviction about a particular sector, thematic funds could be an exciting opportunity. However, if you are risk-averse or prefer steady returns, diversified equity or hybrid funds may be a better fit.
- Knowledge of the theme: Before investing in thematic funds, it is crucial to have a solid understanding of the sector or trend the fund focuses on. New investors who are still learning about market trends might find it challenging to assess the potential risks and rewards of a thematic fund.
- Long-term investment strategy: Thematic funds can perform exceptionally well during periods of growth in a particular sector. However, they can also underperform during market corrections or downturns. New investors focused on long-term goals like retirement or wealth-building may benefit more from diversified funds that provide a mix of growth and stability.
Conclusion
Thematic mutual funds offer exciting growth opportunities, but they come with inherent risks due to their sector-specific focus. While they might appeal to investors with deep knowledge of a particular theme or those with high-risk tolerance, they may not be the best starting point for new investors. Instead, beginners may find greater stability and more consistent returns by investing in diversified mutual funds.
As a new investor, it is essential to balance growth potential with risk management. While NAV in mutual fund investments is important for understanding the performance of a fund, it should not be the only factor influencing your decision. Understanding the broader market, the theme of the fund, and your risk appetite will help guide you toward the right investment choices. If you are new to investing, starting with a diversified portfolio and gradually exploring thematic funds as you gain experience could be a more prudent strategy.
