Thematic and sector funds explained

Thematic and sector funds explained

Mutual Funds
by Nutan Gupta Last Updated: 2021-04-23T19:30:13+05:30

There is a fine difference between the words 'same' and 'similar'. Many novice investors are falsely governed by the idea that thematic funds and sector funds, by and large, are the same thing. This isn't really the case. The above are two of many branches of the mutual fund's tree. One of their similarities, though, is their narrowed approach towards business sector investment.

Sector Funds

Sector funds narrow down your invested money only to the specific sector/industry. For instance, you choose to invest in a company that manufactures beverages. Sector funds will make sure that your funds are invested solely in that particular sector and/or another industry closely related to it. Basically, you are free from any kind of diversification.

Investment in sector funds is all about the right timing. The main idea is to tap-in on the growth of a particular sector/industry. Holding a falling sector would only lead to greater loss impacts. An investor who held IT sector funds during the year 2000 smiled widely (the time when the IT sector was booming), while the one who held it during the year 2008 lamented deeply (the time when the IT sector was falling). The other advantage is its ability to shield you from individual firm-specific risk. Instead of buying individual stocks of the same company that fall in the same sector, investing in sector funds would ensure that one company's poor performance wouldn't affect your portfolio.

The disadvantage around it is the higher rate of volatility. As higher could be the growth curve, there is a serious chance of it falling terribly low. This, hence, requires greater risk-taking capability. The above is also fueled by a wrong investment sector chosen by the investor.

Thematic Funds

As previously suggested, thematic funds are almost similar to sector funds. But here, instead of strictly focusing on specific sectors, thematic funds concentrate on various sectors around a specific 'theme'. If and when you choose to invest, say in a manufacturing thematic fund, the capital would be invested into companies that may be from different sectors but revolve around the common theme: 'manufacturing'.

Your primary advantage for choosing thematic funds is the higher dividend as compared to mutual funds. It offers a smart portfolio structure by neither diversifying nor narrowing your investment too much. Thematic funds help you bypass the drawbacks faced by individual stock investors.

As far as sector funds are concerned, one word sums up its disadvantage: Volatile. Yet, when compared to sector based funds, this volatility in the market tend to affect less adversely.

To conclude

Lucrative and interesting is what sums up when you think about thematic and sector funding. Both come with an understood risk factor. Yet, a broader outlook suggests that these kinds of investment pave way for a stronger portfolio. With the right experience and guidance, an investor can certainly reap rich rewards off his seemingly broad market mentality.

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