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The investment culture in India is on a steady rise, given the rise in incomes, increased knowledge, thanks to education, and the growing number of investment choices. There is something for everyone, from individual stocks to ETFs to mutual funds. An abundance of investment options now for investors to choose from on the way to achieving their financial goals.
In terms of investments, mutual funds allow you to add diversity to your investments at affordable rates in a transparent manner. Today, we’re zooming in on a well-known, yet not completely understood investment strategy in mutual funds—
Thematic Investing. We will discuss its basics, the different investment themes in India and some tips for thematic investments.
What is Thematic Investing?
The term ‘thematic investing’ refers to a top-down investment strategy, which as the name suggests, aims at investing in a specific theme. These themes are chosen on the basis of opportunities brought about by macroeconomic, geopolitical, or technological trends. A fund with infrastructure as its theme, for example, will invest in companies in industries such as steel, cement, construction, etc.
If there is a developing trend for a given subject rising from economic patterns, then investing in enterprises revolving around that theme can be profitable. This strategy relies on identifying particular macroeconomic trends and investing in sectors that stand to gain from them. So, for instance, during the pandemic, healthcare stocks did well because of increased demand for healthcare services. Some more examples of themes are banking, financial services, infrastructure, and consumption.
The biggest distinguishing factor of thematic funds from traditional investment strategies such as the one based on market-caps (small, mid, large) or sectors (targeting companies of a very specific sector), is that it allows investments across different sectors and market caps. The only qualifying factor is that all investments must fall under the umbrella of an overarching common theme.
Thematic Investment in India
The following are some of the more popular themes in India given today’s market conditions.
One of the most crucial human services, healthcare has been well and truly at the forefront again, especially since the pandemic brought its importance into focus. But more than the pandemic, as India grows economically, more and more Indians are accessing private healthcare services. Besides, India has always had far lower hospital beds per population as compared to developed nations. As India grows economically, the gap will be narrowed, thus further growing India’s healthcare sector. Over the past 12 years, India’s healthcare industry has grown at a CAGR of more than 16%, according to a Frost & Sullivan analysis.
Many investors link only the pharmaceutical business to healthcare. However, healthcare is a broad theme that includes hospitals, diagnostics, medical insurance, medical equipment, fine chemicals, and other related businesses.
Ideally, investors who are risk-averse, have a longer time horizon (5+ years), and are looking for long-term capital appreciation, should look at healthcare thematic funds, and carefully considering all other investment risks.
Banking & Financial Services
The lifeblood of an economy, the banking sector enables a multitude of purposes from people simply depositing money in banks as savings, to banks providing credit to businesses, setting up businesses, as well as providing the ecosystem for people to carry out day-to-day financial transactions. India’s march toward economic prosperity depends on a robust and effective banking and financial sector.
Investing with a banking and financial services theme in mind may lead you from equity and equity-related securities of financial services companies, to simply investments in bank stocks. Reading the scheme information document is crucial when it comes to investing with this theme in mind to learn which types of stocks you should invest in.
Domestic consumption is a key protagonist in India’s growth story. According to the Boston Consulting Group, India’s domestic consumption is anticipated to triple by 2030, notwithstanding the one- to two-year negative impact due to the pandemic.
Consumption themed funds invest in equities from a variety of industries that stand to profit from India’s rising consumption. FMCG, automotive, retail, and financial services, including private banks, insurance, AMCs, etc. are some of these industries. India reached an inflection point when its per capita income has surpassed $2000, which should cause a large increase in expenditure over the coming ten years.
Tips on Thematic Investments
● Thematic investing is more suitable for aggressive investors, seeing as market volatility is one of its inherent properties.
● Financial consultants recommend that the foundation of your stock investment strategy should be diverse equity funds. Thematic funds can be used as a supplement to your main portfolio because they have the potential to grow more quickly and outperform over the long term than other types of investments.
● It is recommended for investors who are informed enough to appreciate market cycles and determine whether exposure to particular concepts would produce the best results.
● It is ideal for a medium to long-term investment, preferably a time horizon of 5-7 years at least.
● An ideal investor for thematic investing is an opportunist with a goal of wealth creation from several market cycles and economic trends. In-depth knowledge of macroeconomic factors that influence the fund is vital as well.
When compared to individual stock investment, thematic mutual funds are an excellent strategy to diversify your risk and invest in a certain industry or group. However, these funds also have more risk involved when compared to other mutual funds, so it is recommended that you research the themes you want to invest in before you start investing in a thematic mutual fund.