A Beginners Guide to Thematic Funds

Thematic funds are mutual fund schemes which invest in companies across different sectors based on a common theme.

A ‘theme’ is like an idea which expects certain segments of the economy to outperform or benefit.

For example, during the Covid-19 lockdown, businesses from various sectors were shut. The only sectors which remained open were a part of the essential services like food, healthcare and telecom services. Investments in such sectors during the lockdown, would make for a thematic approach to investing.

Similarly, many investors want to invest in American companies operating in the information technology sector such as Google, Microsoft, Apple etc due to their dominance in the world markets. Such an investment is also following a theme.

According to the Securities and Exchange Board of India, a thematic fund is an open ended scheme with a minimum investment of 80% in equities and equity related instruments following a particular theme.

Classification of Thematic Funds:

If you visit the StockEdge app and click on Mutual Fund classes, you would notice Thematic Funds have been segregated into 3 categories.

1. Thematic Funds Others – This category will contain a list of schemes that invest only in domestic companies. Each fund will consist of stocks following a particular theme. For instance, a ESG fund will include investments in companies which are environmentally friendly and sustainable. Similarly a Digital India scheme will invest in IT and Communications focused Indian companies.
   
   
2. Thematic Funds Global – Schemes under this category invest in equities of companies listed both abroad and in India. But they will follow a set theme and invest only in companies which match the thematic criteria. For instance a global agri fund would invest in top companies both domestic and abroad who are engaged in agricultural businesses.
   
   
3. Thematic Funds MNC – MNC stands for multinational corporations. The theme of such schemes is to invest in companies that have a presence in more than one country. Companies such as Nestle, Microsoft, Tata Motors are examples of MNCs. An investment in a company such as Hindustan Unilever may also count as a MNC investment as the company is majorly owned by Unilever Ltd.

Best Performing Thematic Funds from the StockEdge App:

Best Performing Thematic Funds Global from the StockEdge App:

Difference between Thematic Funds and Sector Funds

Thematic Funds are often spoken about on the same lines as a Sector Fund but there are some stark differences between the two.

Do Read : What are Sector Funds

While a Sector Fund focuses investing only in companies that operate in the same line of business, a Thematic Fund may include companies from very different industries. Put it simply, a sector fund invests in stocks from one sector whereas a thematic fund includes investments in companies from varying sectors.

For example, a low-cost housing theme fund would invest in companies from various sectors such as steel, cement, housing finance and paints.

But a Real Estate oriented Sector Fund would only invest in companies directly associated with real estate development.

Taxation of Theme Funds

Though thematic funds fall under the Equity oriented Mutual Funds category, they are not all taxed like regular equity funds.

The catch is, thematic funds which invest more than 65% of its portfolio in equities of Indian companies are taxed in the same way as other equity funds.

Where, forFor investments offor a period of more than 1 year, a Long Term Capital Gains Tax(LTCG) of 10% would be deducted from profits more than Rs.1 lakh. Under the IT Act, LTCG upto Rs.1 lakh is exempt from taxes.

So assume you invested in a theme fund in Dec 2019 and withdrew in Jan 2021 with a profit of Rs.2,00,000.

Your total tax liability would be = 10% of Rs.(2,00,000 – 1,00,000) = Rs.10,000

Incase of investments for a period less than 12 months, a Short Term Capital Gains Tax(STCG) of 15% would be deducted from the profits. No exemptions are allowed for shorter term investments.

But in case you invest in Global thematic funds, which invests majorly in equities of companies listed abroad, the tax laws of non-equity funds would be applicable. So say, you invested in a global fund focusing on companies that are a part of Nasdaq, your taxation would look something like this:

For an investment held upto 3 years, you will be taxed according to your income tax slab rate. Meanwhile if you held your investment for more than 3 years, a long term capital gains tax of 20% would be deducted from the profits following indexation benefits.

Points to remember before investing in Thematic Funds

• The idea of investment should be your own – Many people can make predictions of the businesses of the future. An idea that is popular currently is the belief in a future for electric cars. But you should avoid investing in themes simply based on the ongoing trends. An idea should first be researched extensively and only invested in after much conviction.
• Don’t invest based on past performance – A theme that has worked in the past may not continue to work in the future. Timing the entry and exit from thematic funds is very important. Thematic funds revolve around shorter tenure investments and needs to be followed proactively.
• High risk-return investments – Investing in thematic funds can be quite profitable if the idea behind it works out. But if it does not, such funds can also make significant losses to the portfolio.
• Suitable for experienced and learned investors – It is only prudent to invest in such funds only if you have a deep understanding of the companies and the factors affecting them. A person with limited experience or macro-economic knowledge should avoid investing in such high risk funds.

You can also view the video below to know more about Thematic Funds!

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