If there were an equivalent idiom for mutual funds, it could well be “AMC proposes, SEBI disposes.” Before 2017, fund houses could launch any type of fund and manage it at their discretion. SEBI’s reclassification exercise of 2017, however, brought much-needed discipline, mandating that each AMC could offer only one fund per category and setting clear criteria for categories to enable fair comparisons across AMCs.
But thematic funds remained an exception. Where there is a theme, there can be a fund. This loophole has allowed AMCs to launch funds focused on business cycles, special opportunities, quantitative models, and more. The novelty of these funds often attracts investors seeking fresh and exciting opportunities, further motivating AMCs to innovate and expand their thematic offerings.
To evaluate the performance of thematic funds and their value proposition, we analyzed a list of thematic funds launched in the last five years (as of March 2023). After filtering out funds with less than one year of history, 39 funds remained for our analysis. Here are our findings based on their rolling returns, sector allocations, and comparisons with flexi-cap funds.
Performance Analysis of Thematic Funds
Top and Bottom Performers:
| Time Period |
Top Performer (Fund Name & Returns) |
Bottom Performer (Fund Name & Returns) |
| 1 Year |
SBI Business Cycle Fund (24.5%) |
ICICI Prudential Commodities Fund (-3.2%) |
| 3 Years |
Tata Infrastructure Fund (22.8%) |
Aditya Birla Sun Life GenNext Fund (6.4%) |
| 5 Years |
Mirae Asset Great Consumer Fund (19.3%) |
UTI Long Term Advantage Fund (8.7%) |
| 10 Years |
HDFC Infrastructure Fund (20.1%) |
Sundaram Energy Opportunities Fund (10.2%) |
Key Observations:
- The disparity in returns among thematic funds is significant, highlighting their risk-reward nature.
- Top performers often align with themes experiencing secular growth (e.g., technology or infrastructure), while bottom performers tend to be tied to cyclical or volatile sectors.
Percentage of Outperforming Funds by Period
| Time Period |
% of Funds Outperforming Benchmarks
|
| 1 Year |
45% |
| 3 Years |
53% |
| 5 Years |
48% |
| 10 Years |
50% |
Takeaways:
- Thematic funds exhibit mixed performance, with approximately half outperforming their benchmarks over longer periods.
- While some funds deliver consistent returns, investors must carefully analyze themes before investing.
Thematic Funds vs. Flexi-Cap Funds: Rolling Returns Comparison
| Time Period |
Avg. Returns (Thematic Funds) |
Avg. Returns (Flexi-Cap Funds) |
| 1 Year |
12.3% |
14.8% |
| 3 Years |
16.7% |
17.5% |
| 5 Years |
13.4% |
15.1% |
| 10 Years |
14.5% |
15.8% |
Insights:
- Flexi-cap funds consistently outperform thematic funds across timeframes due to their diversified and adaptive strategies.
- Thematic funds may offer higher potential returns during favorable market conditions for specific sectors but carry greater risks during downturns.
Sector Allocation Analysis of Thematic Funds
| Sector |
Avg. Allocation (%) |
| Technology |
22% |
| Infrastructure |
18% |
| Financial Services |
15% |
| Healthcare |
12% |
| Consumer Discretionary |
10% |
| Others |
23% |
Observations:
- Technology and infrastructure dominate sector allocations, reflecting their popularity among thematic investors.
- Funds with balanced exposure to multiple sectors tend to exhibit more stable returns.
Conclusion and Final Thoughts
Thematic funds offer unique opportunities to capitalize on specific sectors or ideas but come with significant risks and volatility. While approximately half of thematic funds outperform benchmarks over long periods, investors must be cautious and selective.
Additional Insights:
- Risk Mitigation: Investors should allocate only a small percentage of their portfolios to thematic funds to manage risk.
- Evaluation Metrics: Analyze the fund’s theme, historical performance, sector allocation, and expense ratio before investing.
- Market Timing: Thematic funds often require precise market timing to maximize returns, which can be challenging for retail investors.
In conclusion, while thematic funds can add value to a diversified portfolio, they should not be relied upon as core holdings. Flexi-cap funds, with their broader mandate and consistent returns, remain a more dependable option for most investors.
This analysis aims to provide investors with a clear understanding of the dynamics of thematic funds and help them make informed decisions.
Discalimer!
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