New-age thematic mutual funds: What they are

Whether you are having dinner with friends or making small talk at a family gathering, it is very likely that the conversation veers towards contemporary topics such as hyperloop transport or cryptocurrencies. Now, the buzz around such hot topics is incentivising Asset Management Companies (AMCs) to launch 'New Generation Funds' as they are referred to in Mutual Fund (MF) circles.

Nippon India is launching an Artificial Intelligence fund of funds, while Mirae Asset is launching an ETF focused on cloud computing. Other AMCs have filed draft offer documents with SEBI for funds focused on blockchain, electric transport, clean energy, and defence, among others. Do such funds provide a great investment opportunity, or is it an idea whose time hasn't come yet? 

Also Read: What Are Thematic Funds?

Let’s take a look at the matter from various perspectives:

The AMC

While niche investment products may provide an opportunity to capitalise on new trends, they also serve as a strong marketing tool to pique investor interest and garner more capital or Assets Under Management (AUM). As per SEBI directives, an AMC can have only one fund in each fund category. A New Fund Offer (NFO) allows AMCs to repackage some stocks from existing portfolios under a new name.

The investor

NFOs are affordable at an initial offer price of Rs 10 per unit and allow investors to get on board early into long term value generating prospects. Over the last 5-10 years, certain thematic mutual funds - such as those geared towards banking and financial services, infrastructure, and IT/ITES - have delivered handsome returns, so it is understandable why investors would want to grab the opportunity early on.

Also Read: 8 Reasons Why Women Investors Earn 10% More Returns Than Men In Mutual Funds

The advisory

Investing in thematic funds is inherently risky due to the sectoral concentration of the portfolio. This is even more so for investors who are new to stock markets or do not have other diversified investment options across their asset mix to balance risk and volatility. Investors need to assess whether a particular thematic fund fits in with their financial goals and risk appetite.

Even exposure to sectors you are well-versed in should be managed in line with your personal finance goals. For example, if you understand and are keen on investing in IT and technology funds, a further participation in funds that specifically invest in (say) Artificial Intelligence or Blockchain is unwarranted. Not only does it increase your allocation to the sector, there is also a high probability of having stocks that overlap in both portfolios.

Also Read: Sectoral Funds Vs Thematic Funds: Which One Should An Investor Choose

Conclusion

One of the fundamental pillars of financial planning is due diligence. Do not make investment decisions based on the current fad or fashion. As interesting as the premise of a thematic fund may sound, you need to question the investment decision based on all parameters addressed above. If you’re unsure, take the help of a financial advisor. A fiduciary can guide you on whether a particular thematic fund is worth your time and money.