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How an investor should go about thematic investing

The primary focus of thematic investing is to invest in concepts that can evolve relatively independently of the economic cycle.

May 24, 2017 / 10:57 AM IST

Tejas Khoday

We live in a world where everyone has his or her own perspectives on any issue under the sun. Consequently, by and large, free thinking is encouraged in many aspects of our day-to-day life. But think about it, when it comes to investing in the stock markets, there is a sheer lack of customization in the choice of investment due to the fact that there is limited knowledge and inclination to learn about the intricacies of public listed companies. Due to these inherent limitations among the retail community, the practice and habit of investing is restricted to traditional thinking and the age-old ‘culture of tips’ continues to prevail in India.

However, best investment companies manage investors’ money wisely similar to a doctor assessing the health of person by the pulse beats. I understand and believe that people will always have ideas and preferences when it comes to anything; even if there is no thorough understanding of the underlying subject. Hence, to empower people to take investing decisions based on their fondness and biases, the concept of thematic investing provides an alternative approach to a traditional index strategy and beats sector-based investing in the Indian stock market. In comparison to traditional equity investing, it is much more holistic, simple and hassle-free. It is specifically designed for the millennial generation who are looking to un-complicate the equity markets.

The concept:

The primary focus of thematic investing is to invest in concepts that can evolve relatively independently of the economic cycle. Unlike mutual funds which base their equity allocation primarily on the equity benchmark indices (Nifty & Sensex), thematic investing is about identifying distinct growth opportunities which are not directly dependent on the general outcome of the economy. As an investor, if you use this strategy to construct a portfolio by buying the most suited themes you are likely to outperform the indices by a big margin if your convictions turn out to be right. A diverse mix of themes gives you a broader exposure which goes beyond beating the benchmark equity returns (Nifty or Sensex).


Portfolio building vs portfolio shopping:

Building an optimal portfolio all by yourself is harder than it seems because you will need to have a broad approach and a wider understanding of what is likely to do well in the future. Very few people have the skill, time and privileges to implement this professionally. Since this approach consumes a lot of intellectual resources, juggling it with daily activities may not be feasible to most people.

The other alternative is to go shopping for portfolios and choose from over 100+ unique themes which are based on specific ideas, strategies, sectors, government policies etc. Some popular examples are cashless economy, Digital India Programme, Smart Cities Mission, Durable Dividends etc. These pre-researched portfolios can be ranked using various performance metrics including price performance, volatility and sharp ratio. In other words, investments based on themes are equi-weight by default and can be fully customised with complete focus on investors’ risk preferences. For instance, if an investor wants to take on more risk, he can choose “Max Return” variant of the theme and likewise if an investor is risk averse, then he can choose the “Low Risk” variant of the theme. The stock constituents are also fully customisable and literally, one can start with an account balance as little as Rs 1000. This option makes complete sense for the busy millennials who can make most of their time by engaging in other productive activities instead of stock market research alone.

How themes are built

Although you don’t have to construct themes, it’s important to know how it is done. This will help you gain confidence in the system and give you a sense of satisfaction.

1. Defining the stock universe.
2. Identifying companies and sub-sectors within the stock universe.
3. Shortlist their scope and business activities.
4. Proprietary quantitative research.
5. Thorough fundamental research.
6. Proprietary performance analysis & projections.

7. Right mix of stocks to ensure the optimal exposure.

Multiple benefits of thematic investing

Although investing in themes is easy, it gives you knowledge of what’s hot and what’s not in the Indian economy. It is built with a top-down approach as such for those who want to understand the big picture, thematic investing is the right medium since it has many unique perspective-driven modes which enable you to experience the entire scenario including the trends. Also, if you want to understand how business works, you could drill down into the constituent stocks to assess in-depth all the relevant details. If used effectively, it can make you more aware of what is in store for you by paving the way to be financially wise and successful, too.

Despite the government’s efforts to encourage financial investments, the uptake in retail participation has been moderate given the bullish conditions prevailing in the stock market. Indeed, there is a common desire for all things to move in the right direction but there has been a lack of innovation in the capital markets. In such a scenario, the concept of thematic investment is the apt solution. It contributes to the ecosystem to encourage the young earning population to chip in their savings using theme based investing.

(The writer is Co-founder & CEO of FYERS)
first published: May 24, 2017 10:57 am

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