If we observe our daily routine, we will notice there are many companies whose products are closely tied to your life and probably a million people’s lives across the country and globe. But the question pops up that, taking advantage of such scenarios? We often hear these types of statements during discussions – “I believe electric automobiles are the future”.
“Pradhan Mantri Awas Yojana is a great initiative launched by the government to make housing affordable for all Indian citizens” but what are we doing to create wealth out of this? We live in a world of ever-changing disruptive ideas, unprecedented technological innovations, and changing consumer preferences, which has been a huge paradigm shift.
Thematic investing is a very good form of investment strategy where broader macro-level and business sectors stand to benefit from the materialization of those trends. A successful investor aims to identify these trends in advance and invest in the underlying businesses. Thematic investment is about taking advantage of that change by identifying and investing in companies that could benefit from that change. It involves adjusting our philosophies and beliefs with our investments.
On the contrary, thematic investing seeks to gain from the growth of companies or assets that has the potential to be direct or indirect beneficiaries of a broader trend. Environmental sustainability is globally recognized as a popular trend. The governmental world is over pushing for the adoption of cleaner technologies and regulating polluting industries. To collect profit from the trends, a fund manager may invest in a different company which is spanning across traditional sectors. They may distribute the corpus across renewable power companies and electric car manufacturers.
What are Thematic funds?
Thematic funds tend to cover sectors and identify companies within these sectors that are relevant to the primary theme. A technological fund or health care fund would invest in a specific sector of companies like IT and ITES companies for technological fund and health insurance companies for a health care fund. The thematic fund is likely to invest in themes like Emerging Technology, ESG, secular trends, outcome-oriented, rural development, etc. A singly themed may or may not involve multiple businesses in varied sectors. For example: Given the size of the rural population and the number of farmers in India, rural demand and consumption have been a story to look out for. Budget 2020 announced various reforms around rural upliftment. These themes stand to benefit companies that derive a significant amount of their revenues from the rural parts of India or setting their foot in this space to benefit from it.
Is Thematic Investing better than Mutual funds or other asset classes like fixed deposits?
The basic premise that everyone should understand is that Thematic finances are not the same as Mutual funds. It is simply based on a specific context that varies from one sector to another, more economic orientation, etc. As it offers diverse benefits and high returns, it is likely to outperform other asset classes such as gold and fixed income. Having said that, it is important to know that the presentation of a particular theme includes the risks involved. Therefore, it is recommended that you create a diversified portfolio with minimal financial / business and investment exposure. Investing in a fundraiser is like putting all the eggs in one basket which is that if the basket did not work properly, all the eggs would break. We discuss the pros and cons in the last section of this article.
Another important difference that needs to be carefully considered by investors is between Sectoral funds and Mathematical funds. Sector funds can be part of the Mathematics fund, but it is not the other way around.
Advantages of Thematic style of Investing
- Thematic investments help you benefit from future styles. Because of its forward-looking appearance, it helps you to invest in future Businesses’.
- Unlike Mutual funds that offer diversity, the investment style offers a presentation that focuses on themes, ideas, events, government policies, etc., and invests in related sectors and stocks providing very limited diversification.
- The Planting of Themes requires a complete understanding of the impact of all regional and sectoral trends and the forward-thinking process in order to be able to understand future styles. Therefore, this approach is best suited for investors with good knowledge and business acumen.
- As the thematic investment constantly monitors the disruptive trends and changes in the world, it can serve as a portfolio hedge.
- Thematic investments give investors the opportunity to produce alpha (excessive overpayment).
Disadvantages of Thematic Investing
- There is a great deal of risk in thematic investments as you rely on a particular concept or theme that may or may not receive high returns, especially between various market cycles. This is equivalent to putting all your eggs in one basket, as mentioned earlier.
- If you are an investor in joint venture funds, the cost ratio will be higher when compared to other joint ventures. Higher administrative financing is permissible as it requires in-depth analysis and rigorous research and understanding to identify content, sectors, and businesses within.
Over the past few decades, we have seen many changes in the economic structure that have provided greater investment opportunities. However, themes change quickly over time, which is why as investors, you need to do in-depth research and most importantly allocate only a certain portion of your portfolio.
One of the key challenges, as mentioned earlier, is to effectively identify and implement themes as not all themes will lead to fruitful investment. There are many illustrations of thriving and promising industries that do not have an indication of which company will come to dominate and pass through the industry. This suggests that a successful investment goes a long way in choosing investment baskets rather than a single investment.
Stockbasket provides the investor with expert knowledge, selected stocks based on long-term trading methods identified, thus providing a fair share of the portfolio using an investment style. Investment by topic can be very profitable, as long as you follow the right path.