Thematic funds: A different flavor of Mutual Funds!
A thematic fund is one where the fund�s objective is to deliver optimal returns by investing in stocks which qualify to belong within the particular theme that is considered � the theme could vary from multi-sector, international exposure, commodity exposure etc., unlike a sector fund, theme funds have a broader spectrum to operate in. Theme based funds are often mistaken to be sector funds. Although one could draw some broad comparisons, the scope of a theme fund is typically wider.
Nuances of Thematic funds
As stated earlier, they have a broader spectrum when compared to sector funds, but is limited when compared to Diversified equity mutual funds. Thematic funds by nature are more prone to risk and volatility. The performance of these funds is dependent on the performance of a particular set sector or a theme, unlike a diversified fund which moves in line with the broader markets. Thematic funds could have themes ranging from Multi-Sector, International / Multi - Economy, Commodity, particular style of investing etc. Thematic funds are suited for investors who are well versed with market trends and are hence in a better position to take thematic calls.
Below is a table illustrating how some of the thematic funds have fared in the past, they may not be comparable head-to-head and it may be unfair to assess them against a benchmark. Thematic funds tend to perform based on their own individual cycle. There are ample valuation nuances that the fund manager looks into whilst picking up the holding for each of the funds. Firstly they conduct an assessment whether the fund falls within the theme. Post this they conduct a valuation based on which an appropriate position is initiated within the portfolio. Some of the funds below have done extremely well � Fidelity International Opportunties, Sundaram Rural India, Birla SL Buy India to name a few. Thematic funds are not restricted to equities alone, there could debt funds with themes � UTI Spread, Canara Robeco Indigo are classic examples within this cadre
Returns (as on Feb 24, 12)
|Birla Sun Life Buy India Fund|
|Birla Sun Life India GenNext Fund|
|Birla Sun Life India Reforms|
|Birla Sun Life Pure Value Fund|
|Canara Robeco F.O.R.C.E Fund - Retail Plan|
|Daiwa Industry Leaders Fund|
|Fidelity India Value Fund|
|Fidelity International Opportunities Fund|
|HSBC Progressive Themes Fund|
|Sundaram Rural India Fund|
|UTI Mahila Unit Scheme|
|Canara Robeco InDiGo|
|UTI SPrEAD Fund|
* Returns over 1 year are Annualised
Holdings and cost
Thematic funds operate within their own spectrum and hence benchmarking them to an index may not give a definite picture. However, to get a picture of how they are doing with respect to the market, they are often benchmarked against broader indices such as BSE 200 or BSE 500.
The underlying instruments may vary as per the theme that the individual fund deals with; here�s an overview of few funds and their underlying holding �
Portfolio (As on Dec 30, 2011)
|National Stock Exchange of India Limited||14.57|
|Jammu and Kashmir Bank||6.53|
|Polaris Financial Technology||5.25|
|Bombay Dyeing and Manufacturing Company||5.05|
Surprisingly, there is nothing �International� about the Fidelity International opportunity, however, the company seems to have made a stake acquisition in NSE via private placement which would provide huge value unlocking when NSE goes for an IPO. The other funds have typically picked stories which are grossly undervalued and where the upside potential is huge. The thesis however, could go either way and the mettle of the fund manager is evaluated to the maximum extent whilst he manages a theme fund. The expense ratio for theme funds could range between 2.25%-2.5%, marginally higher than diversified equity mutual funds.
As stated earlier, it may be tough to understand the objective / real �theme� of the fund by merely looking at the fund name. It becomes pertinent to read the prospectus, the investment objective, the fund manager�s background and his past performance in handling other funds. For a novice investor to assess the right theme could be a herculean task, hence for someone starting out to invest in mutual funds, it is best that they stick to diversified equity mutual funds.
Further, theme based funds should not be a part of one�s core portfolio, the exposure should be categorically limited to 10% - 12% and one should add themes which complement the existing portfolio.
The author is CEO & Founder of Right Horizons. He can be reached at firstname.lastname@example.org