Sectoral and Thematic Funds- Features, Advantages, Taxation

Sectoral and Thematic funds are often seen as the same by investors, however, they are two different types of mutual fund categories but only invest in a particular sector or theme. To be specific, Sectoral funds invest the funds in only one sector, while Thematic funds invest in multiple sectors that are woven around a certain theme.

What are Sectoral Funds

A mutual fund that invests a minimum of 80% of its assets (as per the guidelines of SEBI) in a particular sector, such as infrastructure, technology, pharmaceuticals, real estate, banking, etc is known to be a Sectoral fund.

Features of Sectoral Funds

• Sectoral funds vary in terms of their market capitalizations, investment objectives and set of securities
• Various sectors where these funds tend to invest in are natural resources, utilities, real estate, finance, health care, technology, communication, refined metals. In spite of this, some sectoral funds also focus on sub categories such as banking
• Sectoral funds function with the aim of providing exposure to certain specific sectors that are otherwise lagging behind in terms of investors’ attention
• Additionally, these funds are also known to be able to beat the market returns as well as to offer a high-reward ratio

Who should Invest in Sectoral Funds

• Active and educated investors who often analyze the macro-economic situation of multiple sectors can be considered the ideal investors for sectoral funds
• Investors who are ready to face heavy fluctuations in the market with a properly constructed portfolio should only invest in these funds
• If you are an experienced investor with a very high risk appetite, Sectoral funds may be an option for you
• In order to invest in Sectoral funds, you must have an investment horizon of a minimum of 3-5 years

Best Sectoral Funds to Invest in 2020

*Data as on 2 March 2020; Source: Value Research

**The above list has been created on the basis of the Net Asset value of these funds

What are Thematic Funds

Mutual funds that invest in stocks of multiple sectors, revolving around a determined theme are known as Thematic funds. Given the guidelines laid down by SEBI, Thematic funds are strictly bound to invest at least 80% of their assets in stocks of a determined theme, across multiple sectors.

Features of Thematic Funds

• Thematic funds are a type of equity funds and hence are equally diversified in terms of the number of stocks and portfolio construction
• These funds are known to invest in sectors with various themes such as multi-sector, international exposure, export-oriented, rural India, etc.
• However, it must be noted that Thematic funds are considered riskier than diversified equity funds or large cap equity funds
• In order to allow the scheme to perform and deliver inflation-beating returns, investors of these funds must be ready for a long term investment

Who should Invest in Thematic Funds

• You are suggested to invest in Thematic funds only if you have the ability to handle a moderately high level of risk with your investments
• Investors should keep away from investing in Thematic funds if their suitable investment horizon is any less than 5-7 years
• Before investing in Thematic funds, it is advised that investors go through the specific theme that the funds invest in, and check whether or not it is going to deliver positive results in the coming years

Best Thematic Funds to Invest in 2020

*Data as on 2 March 2020; Source: Value Research

**The above list has been created on the basis of the Net Asset value of these funds

Also Read: Sectoral v/s Thematic Funds- Comparison

How to Invest in Sectoral and Thematic Funds

You can invest in Sectoral and/or Thematic funds through either of the following ways-

• Offline mode of investing– If you are not confident of your knowledge, you may choose to invest through a broker. However, investing in a fund through a broker will make you eligible for investments through regular plans that offer different returns and varied expenses in investment. If you wish to invest in the fund independently, you must visit the nearest branch of the AMC of your fund. Don’t forget to carry the following documents-
  • Identity Proof (Aadhar Card)
  • Canceled cheque
  • Passport size photos (around 4-5)
  • PAN Card
  • KYC documents (for KYC verification)
• Online mode of investing– If you do not wish to add on to your expense of commissions or brokerage, you may visit online investment platforms such as Paisabazaar.com wherein you can choose from and compare more than 1,700 funds- all in one place, instead of following the long procedure of visiting the website of each AMC and then choosing from them. Here, you can select the fund in which you want to invest, look at the details and compare similar schemes as well as use SIP Calculator or Lumpsum Calculator to estimate the future value of your investment

Taxation

The short term capital gains from the investments in this fund are taxed at 15% if the units are sold within the time period of 1 year from the date of allotment. However, the long term capital gains made on the sale of units priced at over Rs. 1 lakh, within a year from the date of allotment are taxed at 10% without indexation.

For example-

If an investor has made a capital gain of ₹50,000 on investment in an equity fund, Short Term Capital Gains Tax of 15% would be levied if s/he withdraws the amount within one year of investment. The payable tax would be ₹7,500.

Also, if an investor has made a capital gain of ₹1.5 lakh on investment in an equity fund, and withdraws the amount after 1 year of investment, Long Term Capital Gains Tax of 10% would be levied on ₹50,000. ₹1Lakh is exempted from taxation. The payable tax would be ₹50,00.

Things to be Considered before Investing in these funds

• It must be noted that Sectoral and Thematic funds differ majorly in terms of investment of assets in one or multiple sectors. Sectoral funds invest only in a particular sector, whereas Thematic funds invest in multiple sectors that are woven around a specific, determined theme
• Considering the level of volatility involved in investments in these funds, it is strictly advised that investors’ should not allow these funds to constitute more 5-10% of their portfolio
• Investors of Sectoral and Thematic funds should strictly observe the market conditions, and keep a check on the ongoing macroeconomic situation of the country
• While investing in any of these funds, investors should rather look at the future growth prospects of the specific sector or theme, instead of looking at the past performance of these funds