Thematic funds are equity mutual funds that invest in different sectors and companies of a particular theme. “These funds may have stocks from different sectors," said Harsha Upadhyaya, chief investment officer equity, Kotak Mahindra Asset Management Co Ltd. For example, if the theme is financial services, it will include stocks from sectors such as banking, insurance and mutual funds.

According to Value Research data, 50% of asset management companies offer thematic funds. Are you interested in thematic funds because you think a particular theme is going to be popular? Here is what you should know:

Risks, performance

Firstly, know that the risks associated with a thematic fund are higher because the scope of the stocks it is invested in is concentrated. “High net-worth individuals (HNWI) who want to take the extra risk of beating the markets can look at thematic funds," said Prabin Agarwal, founder of Siliguri-based Prabinagarwal Wealth Management. He said none of the total funds launched last year have done spectacularly well.

Also, you need to look at valuations. “Investments into sector or a thematic fund is advisable when the sector or the themes under consideration are available at attractive valuations," said Rajat Chandak, fund manager at ICICI Prudential AMC. An attractive valuation signifies a fair value of the security and the current worth of the company. There may be noise about certain sectors performing well. However, there is no guarantee that it will do so. External environment can play a part too. Macroeconomic aspects such as gross domestic product, crude oil prices and interest rate make or break a theme. “For example, when it comes to automobiles, robust GDP is a positive. Falling crude oil price and reduction in interest rates has a reasonably positive impact on this space," said Chandak.

What should you do?

“Irrespective of any events happening in the economy, the fund manager has to stay invested in thematic funds unlike diversified funds where the portfolio is flexible," Upadhyaya said. To invest in thematic mutual funds, active involvement and knowledge are required. If you want to invest in thematic funds, you must consult a financial advisory.

“A maximum of 5-6% of your portfolio should be exposed to thematic funds," said Aggarwal. Thematic funds are highly risky and not meant for everyone. Also, you need to get the timing right, which is extremely difficult to do. Hence, tread carefully if you must.