Thematic and sector funds explained

Nutan Gupta

30 May 2017

New Page 1

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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Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 


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Thematic and sector funds explained

Nutan Gupta

30 May 2017

New Page 1

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.

Have Referral Code?