Thematic Mutual Funds: How They Work and Who Should Invest?

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 aligns 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 VNN Wealth Advisors 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.

  1. Short-Term Capital Gains(Investments redeemed before 12 months) will attract a 15% tax.
  2. Long-Term Capital Gains(Investment redeemed after 12 months) above 1 lakhs will be taxed at 10%

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.


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