Investment is an important decision and must be made after gathering sufficient and correct information. Mutual funds are often touted as the best investment instrument. Mutual funds are popular among investors for a variety of reasons – ease of investment, requirement of low minimum investment amount, impressive returns, diversified portfolio and many more.
However, investors often get confused between sectoral and thematic funds. This article aims to explain not only what these schemes are but also to explain the difference between sectoral and thematic funds. Based on these key information, you can make an informed decision regarding which one suits you.
What is a Sectoral Fund?
A sectoral fund is a type of equity fund which invests at least 80% of its total assets in a particular sector like technology, pharmaceuticals, banking, FMCG, etc. A few examples of such schemes are:
- Aditya Birla Sun Life Banking & Financial Services Fund – It has invested around 93% of its assets in the financials sector (as of January, 31, 2019).
- Reliance Pharma Fund – It has around 96% of its assets invested in the pharmaceuticals sector (as of January, 31, 2019).
What is a Thematic Fund?
A thematic fund is a type of an equity fund which invests a minimum of 80% of its assets in a particular theme which comprises of multiple related sectors. A few examples of thematic funds are as follows:
- Mirae Asset Great Consumer Fund – It is a consumption theme based fund which has its investments in multiple sectors which are all related to consumption. It has invested around 33% of its assets in FMCG companies, 19% in financials, 12% in automobiles and another 10% in the shares of companies which deal with consumer durables.
- Invesco India PSU Equity Fund – It is a thematic fund which invests in Public Sector Undertakings (PSUs). It has invested around 60% of its assets in energy sector related PSUs, 12% in financial PSUs, and another 11% in services-providing PSUs.
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Sectoral Fund v/s Thematic Fund
- While a sectoral fund invests predominantly in a particular sector, a thematic fund places its bets on a theme which encompasses a number of sector.
- Both sectoral and thematic funds are high-risk funds, however, a sectoral fund is perhaps an even riskier investment option than a thematic fund due to the relatively small number of companies it is invested in. This is because a sectoral fund invests majority of its assets in only a single sector, thus, all its fortunes depend on the performance that specific sector. However, a thematic fund is invested in multiple sectors, all related to a particular theme. Thus, in case of a thematic fund investment risk gets diversified to a certain extent.
So, Which Fund is Right For You?
Firstly, to invest in either in a sectoral fund or a thematic fund, you must have high risk appetite as both of them are relatively high risk-high return investment options. The factor which shall govern your choice between the two is the magnitude of risk. A sectoral fund comes with a relatively higher risk than a thematic fund due to the relatively limited investment choices. Thus, if your risk tolerance is high risk and you are seeking potentially higher returns, you should go for sectoral funds, however, if you wish undertake relatively lower amount of risk (in comparison to sectoral funds) for potentially impressive returns, you should choose thematic funds as your investment option.