Sector and Thematic Mutual funds are the type of Equity mutual funds that invest in specific sector or theme. Sectors can be FMCG (Fast moving consumer goods), Information Technology, Banking sector, pharma, etc. which can give good returns over specific time period. These mutual funds have high risks and tend to provide returns in cycle. You should ensure that you don’t enter into sector funds when the cycle is at it’s peak.
Let us discuss more about Sector and Thematic Mutual funds in detail.
What is Sector Mutual Funds?
- Sector mutual funds are the type of Equity mutual funds that invest your money in stocks of same sector or industry
- As the name suggest, the stocks of same sectors are selected here, which have the opportunity to grow in upcoming quarters and years
- The investors money is exposed to the same industry stocks due to the opportunity seen by fund manager in upcoming quarters or years
- Since the money is invested in same industry stocks, the pattern of stock prices will be same for all these stocks, thus providing you good returns or bad returns over a period of time
- You should be having allocation to diversified portfolio of equity mutual funds, hybrid mutual funds or stocks before investing in sector mutual funds
- Investing in sector funds mean, putting all your eggs in one basket, and if the basket falls than all eggs will be destroyed
- Those investors who can take risks and can ingest the volatility and cyclic nature of market should be investing in sector funds if they see the opportunity of better returns in upcoming time
ALSO READ: What is Hybrid Mutual Funds
What is Thematic Mutual Funds?
- Thematic Mutual funds are the type of equity mutual funds that invest in specific theme or opportunity that may have multiple sectors covered
- These funds are more diversified than sector mutual funds
- The fund manager sees an opportunity in multiple sectors and select stocks based on such theme
- They can give better returns over a period of time but also have high risk associated with them
- Similar to sector funds, thematic funds also provide returns in a cycle and it would be wise to analyze the market and enter thematic funds when they are at low and not at it’s peak
Things to consider before investing in Sectoral / Thematic Funds
Below are few factors to consider before investing in sector and thematic mutual funds:
- Diversification: Sector funds do not provide diversification since they invest in stocks of same sector, where as thematic funds provide diversification to some extent since they invest in stocks that belongs to specific time during a time frame. It is important that you have your assets allocated to other diversified equity mutual funds, before investing in sectoral or thematic mutual funds.
- Risk: Both sectoral and thematic mutual funds are highly risky in nature since they do not invest based on market capitalization or diversifying your portfolio of investment. They follow the present trend and try to maximize returns based on the consumer demand of the products of companies. The fund manager sees this as an opportunity to get better returns.
- Returns: The returns are cyclical in nature since sector funds are believed to give returns in cycle.
- Timing: You should analyze the market properly and enter the market of sector funds when the prices are low and exit when prices are high to earn better returns
Below is the video of Mutual Fund Returns Calculation.
Mutual Fund Returns Calculation Video
So sector and thematic funds invest in stocks of same industry or a particular theme that may consist of multiple sectors. These funds are highly risky but also provide high returns when you enter the market at low prices of those stocks with good fundamentals.
You must be having allocation to diversified equity mutual funds before investing in sectoral or thematic mutual funds to reduce your risk of putting all eggs in one basket.
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- Best Mutual Funds for 2024
Frequently Asked Questions
Are sector funds a good investment?
Sector funds can be considered a good investment if you have the knowledge about the sector you are investing in. You must be aware about the good and bad cycles in specific sector you want to invest in to enter and exit at approximately better times to get good returns.
What is meant by thematic investing?
Thematic Investing means you invest in a specific theme that may have multiple sectors involved. Like if you see the opportunity after home loan rates are decreased, than people would have demand for cement and other construction material, Banking for loans, paint material and other similar stuff for construction of real estate purpose. This may see a boost in stocks of companies that provide such products and can form a theme to invest in. Such funds are called thematic mutual funds.
Are thematic funds Risky?
Yes thematic funds are risky since it is not guaranteed that the theme will give you better returns or remains flat even if there is demand of their products. So thematic funds are risky in nature.
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