Posted On Monday, May 15, 2023
Novice investors are often confused about whether to invest in aggressive mutual funds to generate returns or focus on conservative investment options like low to moderate-risk mutual funds to earn returns. As we all know, risk and returns go hand in hand. The high return generating mutual funds, such as sectoral and thematic funds, can expose you to higher risks that might not be suitable for investor risk profile.
Sectoral Mutual Funds are sector-specific funds that mainly invest in companies from one particular sector. For example, pharmaceutical funds primarily invest in pharmaceutical companies. Similarly, there are several sectoral funds, such as banking, information technology, energy & power, consumption, auto, etc.
Thematic Mutual Funds invest in sectors or businesses operating within a common theme. For example, a thematic fund that is focused on an agricultural theme might invest in equity stocks of core agricultural companies, farm equipment & automobiles, chemicals, fertilisers, etc. Infrastructure, Rural India, ESG (Environment, Social, Corporate Governance), consumption, services, MNC, PSU, etc. are some more examples of thematic funds.
Sectoral and Thematic funds are equity mutual funds as they typically invest in equity and equity-related instruments. They take exposure to a particular sector or theme as per the mandate and within the sector or theme, they aim to benefit from the growth potential of companies that are likely to do well in the overall macroeconomic and business environment. However, timing the market perfectly and consistently is nearly impossible; hence, it is the biggest risk associated with sectoral and thematic funds. Investors may even suffer a loss if the underlying sector or theme comes under pressure or is out of favour for a long time.
|Invest in specific sectors
|Invest across sectors within a single theme
|80% of the underlying assets are allocated to the specific sector
|80% of the underlying assets are allocated across sectors related to a specific theme
|A little diversification across multiple sectors
|Involve very high concentration risk as the focus is only on one sector
|The risk is relatively lower compared to sectoral funds as they invest across related sectors
|An investor needs to have knowledge of a specific sector that he/she is investing in
|An investor needs to have knowledge of a specific theme that he/she is investing in
Most new investors invest in sectoral and thematic funds by merely looking at their past performance, which is not a good investment approach. Investing in such high-risk funds requires in-depth market knowledge and understanding of the underlying sectors. Bear in mind that the sectoral and thematic mutual fund schemes are highly volatile compared to diversified equity funds. Hence, it is advisable to build a portfolio through diversified funds.
Disclaimer, Statutory Details & Risk Factors:
The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments.
Mutual fund investments are subject to market risks read all scheme related documents carefully.
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