Month: July 2023

Thematic Mutual Funds are equity funds investing in companies connected to a specific theme. 

For example, rural consumption thematic funds will invest in companies that are likely to contribute to the growth of rural consumption in India. For example, FMCG companies, Retail, Telecom, infrastructure, consumer staples, automobiles, cement, etc. 

These funds allow investors to explore and include a specific theme in their portfolio. Interested in knowing more? Read along.

How Do Thematic Mutual Funds Work?

Thematic Funds are open-ended equity funds following a certain theme, an idea. Infrastructure Thematic Funds will invest in shares of cement, steel, power plant, etc.

According to SEBI, these funds must invest at least 80% of total assets into equities of the determined theme. The underlying assets in these funds are researched and strategically placed by the fund manager. 

How are Thematic Funds Different than Sectoral Funds?

As the name suggests, sectoral funds invest in a specific sector. For example, pharmaceutical sectoral funds will only invest in pharma companies. Thematic funds, on the other hand, diversify your assets among various companies tied to a single idea. These companies may belong to different sectors. 

Advantages of Investing in Thematic Mutual Funds

1. Exposure to a Specific Theme

Thematic funds allow investors to invest money in a particular trend or rising theme. For example, India is now embracing the advancement in healthcare. Therefore, companies directly or indirectly contributing to healthcare progress, such as pharmaceutical, biotech, and medical device manufacturing companies can come under healthcare thematic funds. Investing in funds that distribute your assets to a growing trend can create a huge impact over the years. It’s a unique, non-traditional investment strategy based on the economic growth of a certain theme.

2. Diversified Scheme Compared to Sectoral Funds

Thematic funds bring together various industries that other funds may not. For example, Large Cap funds will majorly invest in large-cap companies. Sectoral funds will only invest in a specific sector. Thematic funds invest in companies belonging to any sector and market cap. The only requirement is, these companies must be contributing to the growth of the theme. Therefore, these funds can bring diversity to your portfolio. 

3. Expert Fund Management

Fund managers put their skills, knowledge, and research together to create a thematic scheme. Investors wanting to invest in a specific idea won’t have to pick individual stocks. An expert will distribute your assets among shares of the right organizations. 

4. Possibility of Beating the Benchmark

Fund managers take economic growth, upcoming advancements, and various other factors to create a scheme. A right strategy backed by thorough research may generate benchmark-beating returns. 

Things to Consider Before Investing in Thematic Mutual Funds

1. Financial Goals and Investment Horizon

It takes a significant amount of time for any industry or theme to reach the highest mark. Therefore, thematic funds may take longer to bring the desired outcomes. You may have to stay invested for 5 or more years to benefit from that peak. We advise you to ensure your financial goals and investment horizon align with the scheme. Otherwise, you can consider investing in other mutual fund categories. 

2. Associated Risk

Thematic funds can be risky. The underlying theme, though trendy, may go through plenty of ups and downs. You may want to consider your risk appetite before investing. Evaluate your existing portfolio with your financial advisor before investing.

If you don’t have a financial advisor, give experts at VNN Wealth a call. We’ll walk you through the realistic possibilities of thematic or any other funds. 

3. Semi-Diversified Scheme Compared to Other Mutual Funds Categories

Thematic funds offer better diversity compared to sectoral funds. However, other categories such as Large-Cap or Flexi-Cap offer better diversity. The underlying assets in other equity funds balance each other. Whereas, in thematic funds, if a theme underperforms, the underlying companies may drop value all at once. Therefore, these funds are semi-diverse and the reward depends on the performance of the theme.

4. Expense Ratio

To get expert fund management, fund houses charge you a small fee in the form of an expense ratio. As per SEBI, the ratio ranges from 0.85% to 2.25% of the total managed assets. You can find the expense ratio associated with the fund in the factsheet. Make sure you are aware of the expense ratio to avoid confusion about your actual returns. 

Taxation on Thematic Mutual Funds

Thematic Mutual Funds follow equity taxation based on the holding period. Short-Term Capital Gains(Investments redeemed before 12 months) will attract a 20% tax. Long-Term Capital Gains(Investment redeemed after 12 months) above 1.25 lakhs will be taxed at 12.5%

Who Should Invest in Thematic Funds?

Thematic funds are suitable for investors with high-risk appetites and longer investment horizons. These funds can be risky, hence aren’t ideal for new investors. Though fund managers will take care of funds, investors must also be well-informed about the growing industries. These funds may go through aggressive volatility before reaching the peak. Investors who panic-sell funds may want to consider another scheme.

Conclusion

Thematic funds can deliver superior rewards with higher risk. Holding your investment for a longer horizon can help generate additional alpha on your portfolio using thematic funds. As mentioned above, these funds are suitable for evolved and experienced investors. Beginners can consider investing in other(slightly safer) equity funds before exploring thematic funds. 

Reach out to know more about equity or debt mutual funds. Make an informed investment decision with us.

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Sectoral Funds

Corporate bond funds are the type of debt funds that invest in bonds issued by companies. 

These funds can be of two types. 

• Funds investing in bonds with the highest possible credit rating, so the default risk is negligible. 
• Funds investing in bonds with a slightly lower credit rating that may deliver superior returns. 

Ideal for 1 to 4 years of investment horizon, here’s everything you need to know about corporate bond funds.

How do Corporate Bond Funds Work?

Any organization requires funds for smooth business operations. They can either take bank loans or offer equity instruments. 

However, there are several reasons a company would prefer issuing bonds such as exhausted bank limits, banks not funding a sector, or banks slowing down disbursement to name a few. Also, the company may not be ready for equity dilution. 

So instead, companies issue bonds to generate funds for business operations. 

Corporate bond funds open a gateway for investors to explore these debt instruments.

As per SEBI regulations, these funds need to invest at least 80% of the total assets into corporate bonds with an AA+ and above credit rating. The remaining 20% can be allocated to other debt instruments of varying credit ratings, which may or may not be AA+. Fund managers strategically invest the remaining 20% to benefit from the interest rate cycle. 

Underlying bonds can be of variable maturity periods. You may expect between 1 to 4 years of investment horizon with these funds. 

Benefits of Investing in Corporate Bond Funds

1. Superior Returns 

Corporate bonds carry higher credit risk compared to government bonds but at the same time, offer higher coupon rates to match the additional risk.

So if you are seeking higher returns than government bond funds or fixed deposits, and have the required risk appetite, you can invest in corporate bond funds. 

2. Safe to Invest in

Corporate bond funds invest 80% of the total assets in AA+ rated bonds.

The highest bond rating indicates that the company will not default on your investment. 

3. Portfolio Diversification

Corporate bond funds can be ideal for portfolio diversification. 

Equity funds may deliver superior returns than debt funds, but they are quite volatile. Debt funds, being comparatively less volatile, balance the risk and rewards. 

Things to Consider Before Investing in Corporate Bond Funds

1. Allocation

As mentioned above, these funds have two types of allocation strategies. Funds with AA+ rated bonds would be safer than funds having bonds with lower credit ratings.

If you have a low to moderate risk appetite, go with funds that invest in AA+ rated bonds. Else, you can explore lower-credit rating bond funds as they may deliver superior returns. 

Be sure to check the allocation before investing in corporate bond funds. 

2. Risk Factor

With the highest-rated bond funds, the credit risk would be lower but returns may also be lower. On the other hand, slightly low-rated bonds might be risky but may deliver better returns.  

The interest rate risk can also affect the overall returns. The bond prices are inversely proportional to the interest rate. When the interest rate rises, the bond prices fall, and vice versa. 

You can lower the interest rate risk by holding your investment until maturity. 

3. Investment Horizon

Corporate bond funds are best suited for 1 to 4 years of the investment horizon. Invest only if the tenure matches your portfolio and your investment goals.

4. Underlying Assets

In these funds, 80% of the total assets would be high-rated corporate bonds. However, fund managers may invest the remaining 20% in slightly low-rated bonds. 

The overall risk of the fund changes with the remaining 20% allocation.

5. Fund Manager’s Track Record

A fund manager’s strategy plays a vital role in managing debt funds. Their analysis and decisions will reflect upon your portfolio. Hence, it is essential to check the track record of the asset management company and the fund managers. 

Tax Implications

The tax rules on debt funds have been updated since April 2023.

Both Long Term Capital Gains (Investment redeemed after 36 months) and Short Term Capital Gains (Investment redeemed before 36 months) will be taxed as per the investor’s tax slab.

The indexation benefit on long-term capital gains is only applicable for hybrid funds with more than 35% and less than 65% exposure to equity. 

Find out tax rules across all mutual fund categories.

Who Should Invest in Corporate Bond Funds?

Corporate bond funds are suitable for investors with 1 to 4 years of investment horizon. 

These funds can be an alternative investment avenue to fixed deposits. With slightly higher risk, investors can benefit from superior rewards.

If you are an aggressive investor, you can consider investing in low-rated bond funds. These funds may offer higher returns, but the risk of default increases. We recommend talking to a professional financial advisor before investing in these funds.

Final Thoughts

Corporate bond funds are ideal for investors looking to park their money for 1-4 years. 

Invest in high-rated bond funds to avoid default risk, unless you are an aggressive investor. In that case, you can explore low-rated bond funds provided it aligns with your risk appetite. 

Holding your investment till maturity can lower the interest rate risk as well. 

If you have any further queries, get in touch with VNN Wealth advisors. You can get your portfolio reviewed and plan your next investment strategy. 

Sectoral funds are equity funds that invest in companies in the same sector or industry. The sectors can be banking, pharmaceuticals, information technology, etc. These funds can potentially deliver benchmark-beating returns in a rising market scenario (bull phase). 

However, the associated risk can be high when the sector is going through ups and downs. 

Let’s understand further who should invest in sectoral funds.

How Do Sectoral Funds Work?

As per SEBI guidelines, these funds must invest at least 80% of total assets in the given sector. For example, an IT sectoral fund will invest the majority of the assets in IT companies.

Fund managers distribute the assets in large-cap, mid-cap, and small-cap companies in the specific sector. These companies are selected upon the fund manager’s strategy, analysis, and the trend in the market.

How are Sectoral Funds Different Than Thematic Funds?

Sectoral funds invest only in a specific sector. Whereas thematic funds invest in a theme that ties various sectors together. 

For example, an infrastructure thematic fund may invest in cement, steel, and construction firms. A sectoral fund sticks to the defined sector. 

Benefits of Investing in Sectoral Funds

1. Exposure to a Specific Sector

Sectoral funds allow investors to tap a specific industry that may perform well in coming years. Instead of investing in individual stocks of the sector, investors can park their money in these funds.

Fund managers take care of the allocation depending on the sector’s performance against the benchmark. 

2. Potential of Superior Returns

Sectoral funds invest in equity instruments of the same industry across market capitalization. There’s a good chance the sector may outperform and deliver superior returns. 

With thorough research and analysis, the underlying assets may beat the benchmark. Therefore, investors can earn superior returns when the sector is performing well.

3. Portfolio Diversification

The only diversification sectoral funds offer is the allocation across market capitalization. However, you can introduce diversification to your overall portfolio by introducing a new emerging sector. You can take advice from your financial advisor to choose the sector that aligns with your portfolio. 

Factors to Consider Before Investing in Sectoral Funds

1. Your Risk Appetite

Sectoral funds can be risky at times. You can earn higher returns if the sector grows. However, if the sector underperforms, all the underlying companies may drop values. 

As the diversification within funds is limited, these funds can be more volatile than other schemes. So you may want to consider your risk appetite before investing in sectoral funds. 

2. Investment Horizon

Equity funds expect you to stay invested for a longer horizon to beat the volatility. A sector also takes time to grow and achieve the desired outcomes.

Therefore, you may have to consider staying invested for a longer duration. Make sure the expected horizon of the sectoral funds is suitable for your portfolio. Otherwise, you can always explore other equity schemes. 

3. The Growth of The Sector

Make an informed decision by researching what’s expected from the sector. Select a sector that truly has the potential to grow in the coming years.

That way, you will be aware of the timeline the funds take to reach the returns you are looking for. However, please note that markets can be uncertain. A few ups and downs along the way are inevitable. 

4. Performance of The Fund Manager

Checking the past performance of the sectoral fund would be of no use. The sector is most likely to perform differently in each economic cycle.

Instead, check the performance of the fund managers. How many times have their analysis delivered superior returns over the years? That’ll give you an idea of the expertise of the fund manager.

5. Expense Ratio

The expense ratio is the small fee that mutual fund houses charge you for managing your assets. As per SEBI, the fee can be between 0.85% to 2.25% of the total assets under management. Make sure you read the factsheet of the fund to understand the expense ratio structure for the fund. 

Tax Implications on Sectoral Funds

Sectoral funds follow equity taxation rules based on the investment horizon. 

Investors have to pay a 20% tax on Short-Term Capital Gains (Investments redeemed before 12 months)

Long-Term Capital Gains (investments redeemed after 12 months) above 1.25 lakhs are taxable at 12.5%.

Who Should Invest in Sectoral Funds?

Sectoral funds are suitable for investors with high-risk appetites and longer investment horizons to beat volatility. Similar to thematic funds, these funds are not ideal for new investors.

Investors who can handle high volatility without panic-selling funds can go for it. However, it is important to make an informed decision.

Make sure you are aware of the sector’s growth potential and fund manager’s history before investing.

Conclusion

Equity mutual funds offer a wide spectrum of investment options. Sectoral funds are one such avenue that allow investors to explore a growing industry. Though the risk can be high, the reward can also skyrocket when the sector expands over the years. 

So if you want to distribute some of your assets to a high-risk-rewards scheme, go for sectoral funds.

Advisors at VNN Wealth can help you choose the right funds as per your risk appetite. Get your portfolio reviewed and sketch an investment strategy to fulfill your financial goals.

Want the stability of Large-Cap funds and superior returns of Mid Cap funds in a single scheme? The Large and Mid Cap Funds can be your next investment avenue. 

In 2017, SEBI launched this new category to offer Stability and Growth to investors exploring equity funds. Instead of separately investing in large and mid cap funds, you can just select a fund that has exposure to both categories. 

Read along to know more.

How Large and Mid Cap Funds Work?

Large Cap Funds primarily invest in the top 100 companies on market capitalization. And Mid Cap Funds invest in companies ranked from 101 to 250 on market capitalization. Therefore, these funds invest across the first 250 companies from various sectors on the market capitalization. 

As per SEBI regulations, fund houses must invest at least 35% each in large cap and mid cap companies. The remaining 30% can be distributed among equity, cash, or debt depending on the fund manager’s strategy, 

Why Invest in Large and Mid Cap Funds?

1. Growth and Stability 

Large Cap companies are thriving organizations with comparatively low volatility, hence lower risk. These companies generate significant returns over a long duration. Mid Cap funds, on the other hand, can be slightly volatile. However, there’s a good chance these funds will deliver superior returns compared to pure large cap funds. 

2. Portfolio Diversification

A single scheme can give you exposure to large and mid cap companies. Depending on the Fund manager’s strategy, you may also get exposure to Small Cap or Debt securities. Distributing your assets across various categories of equity and debt can encourage superior returns with lower risk. 

3. Ideal For Long Term Investments

These funds can be ideal for children’s higher education, planning a wedding, or buying a house in the next few years. Equity funds perform well over a longer horizon, more than 4 to 5 years.

You can rely on Debt Funds for short-term financial goals. And park your money in these funds to fulfill long-term financial goals.

Things to Consider Before Investing

1. Your Risk Appetite

These funds are less riskier than pure mid cap or small cap funds. Investors wanting to explore equity funds with lower risk can go with these funds. If you are an aggressive investor willing to take more risk, you can consider pure mid cap or small cap funds. However, we recommend discussing this with your financial advisor before taking a call. 

2. Investment Horizon

Align your investment horizon and financial goals with the scheme that you choose. Equity funds are volatile in short-horizon. Holding these funds for more than 5 years can lower the risk and generate a handsome outcome.

3. Fund Performance

Check the rolling returns of the funds to evaluate the performance. You can compare the performance of the funds from the same category with the benchmark. That’ll give you an idea of the kind of returns the fund has generated over the years. Remember, evaluating past performance isn’t the only criteria to choose the fund. 

4. Expense Ratio

Fund managers manage your investment by distributing it across stocks of various companies. To actively manage your funds, fund houses charge you a fee in the form of an expense ratio. Active funds have a slightly higher expense ratio than passive ones. You can compare the expense ratio of funds from similar categories before investing. 

Tax Implications

The taxation on these funds is the same as any other equity mutual fund.

You have to pay a 20% tax on Short Term Capital Gains (Investments held for less than a year).

Long-term Capital Gains(investments held for more than a year) above 1.25 Lakhs are taxed at 12.5%.

Who Should Invest in These Funds?

These funds are riskier compared to pure Large Cap, but less risky than pure Mid Cap or Small Cap funds. Investors with low to moderate risk appetite and longer investment horizons can invest in these funds. 

These funds are also suitable for diversifying the portfolio across market capitalization. Investors wanting to invest in Mid Cap with lower risk can rely on the stability of Large Cap exposure. 

To align your risk appetite with the fund, you may want to consider the asset allocation. After investing 35% each in large and mid cap, fund managers may invest a small chunk in small cap or increase the exposure to mid-cap. This can change the overall risk of the fund.

To Sum Up

Large and Mid Cap Funds distribute your asset across companies ranking from 1 to 250 on the market capitalization. As these companies belong to various domains, you get an opportunity to diversify your investment. As Large Cap maintains stability, Mid Cap encourages growth. If your risk appetite doesn’t align with pure Mid Cap or Small Cap, these funds can be your entryway. 

Got more queries regarding equity funds? Get in touch with our experts.