IN THE world of investing, trends are more than just buzzwords—they’re signals of where capital, innovation, and human behaviour are heading. Thematic investing, a strategy gaining traction among retail and institutional investors alike, taps into these signals. It enables one to align their portfolio with transformative shifts shaping our economies, societies, and technologies. But like all investment strategies, it carries both promise and pitfalls.
At its core, thematic investing involves placing bets on broad, structural changes rather than specific sectors. These changes can be demographic, such as ageing populations; technological, like artificial intelligence or electric vehicles; environmental, including clean energy or water scarcity; or socio-economic, such as the rise of the middle class or the shift to digital consumption.
Rather than spreading investments across every sector, thematic investors focus on narratives that will play out over the long term. For instance, if one believes that renewable energy is set to transform the global power landscape, such investors may choose a mix of solar panel manufacturers, wind energy firms, battery storage providers and hydrogen technology players, regardless of which traditional sectors they fall under. While thematic and sector investing may appear similar on the surface, they are not the same. A theme consists of several related sectors.
Thematic investing is gaining popularity for good reason. The world is changing fast—whether it’s climate change, artificial intelligence or digital disruption, investors are realising that these structural shifts won’t wait for the economy to catch up. Thematic strategies allow people to tap into these megatrends early and ride the wave. What makes them especially appealing is their story-driven nature. Themes like clean energy or sustainable agriculture resonate with a generation that wants both profit and purpose. These ideas are easy to grasp and emotionally engaging. On top of that, access has become far easier. Thanks to mutual funds, ETFs and fund-of-funds, thematic investing is no longer just for the experts; it’s now available to everyday investors in various options.
The biggest reason for the popularity of thematic investing is its ability to provide focused exposure to high-growth areas. Over the last decade, investors who identified and acted on trends such as cloud computing, renewable energy or e-commerce have often outperformed broader market benchmarks. In a market environment where average performance is often diluted by diversification, thematic investing allows portfolios to lean toward concentration on high-return opportunities. It also adds a layer of diversification, especially when themes span different sectors.
Thematic investing carries some risks. Timing is tricky, as not all themes are mature, and some may be short-lived. The dotcom bubble showed how even strong ideas can lead to losses if entered at the wrong time. Concentration is another risk; themes can soar in bull markets but fall hard when sentiment shifts. A narrow bet like healthcare or energy may lag if macro conditions change. Without a clear plan, emotional decisions and poor exits can hurt long-term returns. Tax impact from frequent switches is another factor investors must manage carefully.
For those considering thematic investing, there are a few ground rules worth following. Invest only in themes you understand and can commit to for a reasonable time frame. Jumping in for a few months and expecting outsized returns is not a sound approach. Patience is essential. Keep your thematic exposure as a satellite holding, an addition to your core diversified portfolio, not a replacement for it. Most importantly, review your themes periodically. The world evolves, and so must your portfolio. What looked promising two years ago might not hold the same promise today.
For investors seeking thematic exposure, choosing a dedicated fund or a fund-of-funds (FoF) can offer a streamlined and professionally managed approach, addressing the complexities often associated with individual stock selection. The ICICI Prudential Thematic Advantage Fund (FoF) exemplifies this convenient option.
It is an FoF scheme that aims to invest in emerging opportunities across sectors and themes. As of July 30, 2025, this FoF scheme delivered a one-year return of 8.23 per cent. Over the longer term, it has shown strong performance with a CAGR returns of 20.68 per cent over three years and an impressive 26.08 per cent over five years.
The writer is Chief Sherpa, Finsherpa Investments Private Limited