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Best Thematic mutual funds are a class of equity funds that concentrate their portfolio towards equities of companies operating with a particular theme. We have covered the following in this article on the best thematic mutual funds:
Thematic mutual funds are a type of equity funds that invest in stocks that are tied to a certain theme or idea. For example, a thematic infrastructure fund invests in companies that are involved in infrastructure development and construction. This fund may invest in stocks of companies producing cement, steel, and so on.
Thematic mutual funds are suitable for those looking to benefit from the success of a particular set of companies that work on a specific theme. These funds may seem to be similar to sector funds. However, these funds differ from sector funds in the manner their portfolio is constructed. Thematic funds invest in companies across sectors that are tied to a given theme.
This makes thematic funds possess higher levels of risk of concentration. If the economy is favouring the underlying companies to achieve their goals, then these funds perform well. However, your losses can be magnified if there is an adverse development in the economy and hinders the companies from achieving their objectives. Therefore, you may consider investing in a thematic fund if you are willing to assume higher levels of concentration risk.
You need to have an investment horizon of at least five years if you are to invest in a thematic mutual fund. This gives your investments enough time to provide stable returns over time and go through the business and market cycles. If your investment horizon is shorter, then you may not consider these funds as you don’t give your investments enough time to mitigate the associated risks.
A thematic mutual fund can be considered the best in its category if it has consistently performed better than its peers and outperformed the benchmark along with having good financial ratios. You have to analyse the track record of the fund under consideration from the returns point of view. You may look at its past five year returns.
Particularly, you have to analyse the fund’s performance when the markets were down. A good fund is not affected much by market volatility. In simple words, the market movements should not influence the fund’s performance to a greater extent. The fund should have provided decent returns despite the market turbulence. Apart from that, you have to look at the financial ratios such as Alpha, Beta, Sharpe Ratio, and standard deviation. The returns generated by the scheme must justify these ratios.
Since thematic funds are a class of equity-oriented funds, they are taxed like any other equity mutual fund scheme. The dividends are added to your overall income and taxed at the income tax slab rate you fall under. The rate of taxation of capital gains depends on the holding period.
Short-term capital gains are realised on selling your fund units within a holding period of one year. These gains are taxed at the income tax slab rate you fall under. In simple words, short-term capital gains are added to your overall income and taxed at your income tax slab rate.
Long-term capital gains are realised on redeeming your fund units after a holding period of one year. These gains of up to Rs 1 lakh a year are tax-exempt, and any gains exceeding this limit attract a tax at the rate of 10%, and indexation is not allowed.
Since thematic mutual funds make their asset allocation towards companies of a certain theme, they essentially carry a high risk of concentration. Therefore, only aggressive risk investors may consider investing in a thematic mutual fund scheme. Apart from that, these funds carry market and volatility risk.
Market risk is the probability of the market movements resulting in the reduction of the worth of your investment. This may happen due to various factors; some are beyond your control. Volatility risk is the possibility of the worth of your investment going down due to a sudden drop in the price of the underlying securities.
You have to consider the following before investing in a thematic fund scheme: