Introduction to Thematic PSU Mutual Funds

As the name suggests, thematic PSU mutual funds construct their portfolio in such a way that most of their asset allocation is made towards the equity shares of the state-owned companies. By investing in a thematic PSU fund, you get exposure to a diversified portfolio constituted by top-performing PSUs across sectors.

Who Should Consider Investing in the Best Thematic Mutual Funds?

Investors who are looking to gain exposure to a well-constituted portfolio having exposure to public sector undertakings across sectors may consider investing in a thematic PSU fund. These funds give you the benefit of diversification as it invests in state-owned companies across all sectors.
Since PSUs issue the underlying securities of these funds, there is a high risk of concentration involved. Therefore, investing in a thematic PSU fund is suitable for only those willing to bear higher levels of risk. If you are a risk-averse investor or someone looking to diversify your portfolio, then you may not consider investing in these funds.

Taxability of Best Thematic Mutual Funds

The dividends offered by any mutual fund scheme are added to your overall income and taxed at the income tax slab rate you fall under. Until Budget 2020, dividends were made tax-free in the hands of investors as the companies paid the dividend distribution tax (DDT).
Redemption of units within a holding period of one year results in short-term capital gains. These gains are taxed at 15%, irrespective of your income tax slab rate. You get long-term capital gains on selling your fund units after a holding period of one year. These gains of up to Rs 1 lakh a year are made tax-exempt. Any gains over this limit attract long-term capital gains tax at 10%, with no indexation being allowed.

Risks Associated With Thematic PSU Mutual Funds

Thematic PSU mutual funds are associated with a high level of concentration risk as their portfolio mostly includes equity-linked securities of state-owned companies. Other than that, these funds also carry market risk and volatility risk.
Market risk is the probability of your investment’s worth reducing due to adverse market developments. Volatility risk is the possibility of your investment’s value going down due to a sudden drop in the price of the underlying securities.

Advantages of Investing in the Best Thematic PSU Mutual Funds

You get the following benefits by investing in a thematic PSU mutual fund:

• You get exposure to a diversified portfolio consisting of equities of PSUs across sectors.
• You get the potential to earn benchmark-beating returns in the long run.
• Investing in these funds can prove to be an excellent investment option to realise long-term financial goals.

Things to Consider Before Investing in the Best Thematic PSU Mutual Funds

You have to consider the following factors before investing in a thematic PSU mutual fund:

1. Risk profile: Since these funds carry a high risk of concentration, you need to be ready to assume higher risk levels essentially. If you are a risk-averse investor, you may not consider investing in thematic PSU mutual funds.
2. Investment horizon: Since these funds concentrate their portfolio towards only PSUs, it naturally makes them risky. To mitigate the associated risks to a greater extent, you need to have an investment horizon of at least five years. If your investment horizon is shorter, then you may not consider investing in a thematic PSU mutual fund.
3. Diversification: You need to be aware of the fact that these funds invest only in the equity-linked securities of state-owned companies. Therefore, the funds do not have a well-diversified portfolio. You may not consider these funds as a viable option if you are looking to diversify your portfolio across sectors and capitalisations.