IN THE dynamic investment environment, investors are perpetually searching for methods that can potentially yield better returns while aligning with their own convictions, interests, or perceptions of the future. One such strategy that is gaining growing popularity in India is thematic investing. Unlike traditional investment approaches that are mainly rooted in market capitalisation, sector exposure, or replication of indexes, thematic investing is founded on innovative concepts, trends, or long-term structural shifts expected to drive growth.
Understanding thematic investing
Thematic investing involves identifying and investing in companies, industries, or sectors that are associated with a particular theme. The themes are generally based on important trends or macroeconomic changes, including technological revolution, demographic change, urbanisation, the use of renewable energy, or changes in consumer attitudes.
For example, if an individual believes India’s focus on clean energy will increase significantly over the next decade, they can invest in solar energy firms, electric vehicle manufacturers, battery makers, or green infrastructure firms.
Why thematic investing works well for Indian investors
India’s growth story is underpinned by a mix of demographic advantages, government reforms and domestic consumption. Thematic investing offers a way to take advantage of these drivers more directly than through generalised investment. Certain reasons why thematic investing is preferable for Indian investors:
Focused growth opportunities – By focusing on particular trends, investors can potentially enjoy higher growth rates in those sectors
Alignment with individual beliefs – Investors may invest in themes close to their heart, e.g., renewable energy, empowerment of women, or digitalisation
Long-term focus – Thematic strategies tend to be associated with structural trends that unfold over a period of years and therefore are well suited for long-term wealth generation
Opportunities and threats
While thematic investing is lucrative, it is not risk-free. Since investment is made in one area, it might prove to be more risky than a diversified portfolio. If the theme selected performs poorly or encounters unexpected setbacks, returns can be impacted negatively. Moreover, themes mature slowly, so patience is necessary. For instance, the theme of electric vehicles could be huge in India, but it would take years for broad-based adoption because of infrastructure and affordability limitations. Investors thus need to expect medium- to long-term time frames with potential intermediate volatility.
Best practices for thematic investors
Investors should do the following to practice thematic investing successfully. Firstly, know the drivers of the theme, the regulatory landscape, and the growth opportunity and regardless of the theme’s underlying strength, do not overpay for the stocks. Keep an eye out for events that may impact the theme, like policy shifts or technological upsets.
Thirdly, instead of putting all money into a single theme, diversify across several strong themes. Further, remember that themes can take years to achieve their complete potential, so short-term movements in the market should not influence your decisions.
Thematic investing via mutual funds
For those who want to invest in themes without choosing individual stocks, thematic mutual funds or funds-of-funds are an easy way out. The funds collect money from investors and invest in a basket of companies belonging to a particular theme/themes.
The benefits of thematic mutual funds or funds of funds are:
Professional management – Fund managers with experience carry out research and pick appropriate stocks within the theme
Diversification within the theme – The fund owns several stocks adhering to the theme, minimising the effect of any one stock’s bad performance
Accessibility – Investors can begin with relatively small sums through systematic investment plans (SIPs)
Taxation – Investing in thematic fund of funds is tax efficient. Gains made on capital gains made after a holding period of 24 months is taxed at 12.5 per cent.
But investors must not forget that thematic funds have the same risks as direct thematic investment, such as possible underperformance if the theme does not work out as anticipated. Hence, it makes sense to put just a portion of one’s portfolio in thematic funds and hold the balance in more diversified investments.
Whether undertaken directly through individual stocks or indirectly through thematic mutual funds or funds-of-funds, thematic investing enables investors to voice their beliefs and potentially gain higher long-term returns. Yet, as with all investments, the outcome is subject to the quality of selection, monitoring, and the maintenance of a rigorous, long-term mindset.
The writer is founder, Safebridge Investment Services Private Limited