Which are the 5 best thematic mutual funds to invest in 2023-2024

Considering mutual fund investments but still deciding which one to pick? Sectoral and thematic mutual funds are increasingly favoured by investors seeking higher returns. By investing in these funds, you can diversify your portfolio and potentially achieve substantial returns as they focus on company stocks within specific sectors or themes. These types of investments are based on a particular sector or theme. In this blog, we will discuss what these investments are about and introduce you to the 5 best thematic mutual funds to invest in for the year 2023-2024.

Enhancing your investment portfolio and aiming for higher returns can be achieved through sectoral and thematic mutual funds. The recent surge in net flows into these schemes shows that investors are taking notice of the potential for high returns in sectoral and thematic mutual funds. 

What are Sectoral and Thematic Mutual Funds?

Sectoral mutual funds invest primarily in companies within a particular sector or industry. Some common sector focused funds include technology, healthcare, green energy, financial services, and real estate. 

Thematic mutual funds invest in companies related to a specific theme or trend. They are meticulously crafted to invest in companies and assets that are intricately connected to a specific overarching theme or trend.

The 5 Best thematic mutual funds to invest in 2023-2024
 

(Source: The Economic Times)
 

1. Tata Digital India Fund

Over the past five years, the Tata Digital India Fund has delivered an impressive annualized return of 20.76%. This mutual fund invests in companies that are likely to be profitable from the growth of the Indian digital economy. Tata Digital India Fund tracks the Nifty IT TR index and has delivered consistent returns over the years. It is an grat option for investors who are look forward to invest in the digital economy.

2. ICICI Prudential Technology Fund

In the previous five years, the ICICI Prudential Technology Fund has performed a strong annualized return of 21.6%. This mutual fund is dedicated to investments in companies within the technology sector, positioning it as an attractive choice for tech-savvy investors. The fund manager of ICICI Prudential Technology Fund identifies companies that have a competitive advantage and are likely to benefit from technological advancements. 

3. Aditya Birla Sun Life Digital India Fund

Over the past five years, the Aditya Birla Sun Life Digital India Fund has delivered a solid annualized return of 22.9%. This mutual fund focuses its investments on companies actively participating in the dynamic digital economy, making it an appealing choice for those eyeing digital-driven opportunities. The fund managers of Aditya Birla Sun Life Digital India Fund identify companies that have disruptive business models and are likely to benefit from the growth of the digital economy. 

4. SBI Technology Opportunities Fund

SBI Technology Opportunities Fund has achieved a noteworthy annualized return of 21.25%. This mutual fund strategically directs its investments towards companies assured to reap the rewards of the technology sector, making it an attractive choice for tech-savvy investors.The fund managers of SBI Technology Opportunities Fund identify companies that have competitive advantages and are likely to benefit from technological advancements.

5. Nippon India Pharma Fund

Over the past five years, the Nippon India Pharma Fund has showcased its ability to provide competitive returns to its investors, with an 5yr annualized return of 18.34%. These annual returns, while subject to market fluctuations, underscore the fund's capacity to seize opportunities within the pharmaceutical and healthcare sector.

Why Invest in Sectoral and Thematic Mutual Funds?

Sectoral and thematic funds provide exceptional opportunities for investing in particular sectors, which allows one to take advantage of companies well-position holding and benefit from the specific trends. For instance, if you anticipate the digital economy's growth in the coming years, you can opt for digital technology mutual funds. These funds invest in companies that operate in the digital economy, such as e-commerce, software, and IT services.

Benefits of Investing in Sectoral and Thematic Funds
 

1. Focused Exposure: Both types of funds allow investors to concentrate their capital on a particular industry or theme. Sectoral funds allow investors to focus on their investments in sectors they assume and believe that can outperform.
    
2. Diversification within the Sector: Although these funds focus on a single sector or theme, they often hold a diversified portfolio of assets within that category. This diversification may reduce the risks associated with respective stocks.
    
3. Alignment with Beliefs and Trends: Thematic funds enable investors to align their investments with their beliefs and expectations for future trends. For example, an investor is impassioned about environmental sustainability and chooses to invest in a renewable energy or clean technology fund.
    
4. Professional Management: Sectoral and thematic funds are managed by experts who have an in-depth understanding of the sector or theme. This professional management can help optimise returns.

Risks of Investing in Sectoral and Thematic Funds

1. Concentration Risk: By nature, these funds concentrate on specific sectors or themes, which can result in higher concentration risk. If the industry chosen underperforms or faces challenges, the fund's performance can be significantly impacted.
    
2. Cyclical Vulnerability: Some sectors are highly cyclical, and their performance can be closely tied to economic cycles. Investing in these sectors can be riskier, as economic downfall may lead to slight losses.
    
3. Market Timing Risk: Sectoral and thematic funds often require precise market timing. If an investor enters or exits a fund at the right time, they may avoid potential gains or incur losses.
    
4. Lack of Diversification: While thematic funds provide diversification within their chosen sector or theme, they may lack diversification across different industries. This can expose investors to systemic risks affecting the entire market.
    
5. Limited Upside in Downturns: When a specific sector faces headwinds, it may be challenging for the fund to generate positive returns. Diversified funds may have better prospects during such periods.

Comparison of Sectoral/Thematic Funds and Diversified Funds

Benefits and Disadvantages of Diversified Funds

Diversified mutual funds invest in stocks of companies operating in different sectors and themes. They offer a diversified investment portfolio that reduces the risk of volatility in the market. However, diversified mutual funds may provide lower returns than sectoral and thematic mutual funds.

Choosing between Sectoral/Thematic and Diversified Funds

Choosing between sectoral/thematic and diversified funds depends on your investment goal and risk appetite. If you are looking for high returns and have a high-risk appetite, sectoral and thematic mutual funds are a great option. However, if you are looking for a more diversified investment portfolio that reduces the risk of market volatility, you can go for diversified mutual funds.

Conclusion

To invest in mutual funds, consider sectoral and thematic funds, which offer higher returns by focusing on specific industries or trends. These funds facilitate you to manage your investments with sectors or themes you believe will prosper. While they offer enticing opportunities, they come with risks, such as market sensitivity. In contrast, Diversified funds provide stability but potentially lower returns. So, constantly evaluate your investment objectives, risk tolerance, and research the past performance of the specific sector or theme to pick the best mutual funds to invest.

Frequently Asked Questions

Q1. What's the difference between sectoral and thematic funds?

Ans. Sectoral funds target specific industries (e.g., technology, healthcare, etc), while thematic funds invest in companies aligned with broader themes (e.g., digital economy, renewable energy).
 

Q2. Can i invest in thematic funds through a broker?

Ans. Yes, you can invest through a stock broker or directly through the fund company's website. Ensure you have the necessary documents and funds to open an account.
 

Q3. What are the key features of thematic funds?

Ans. Thematic funds typically include a portfolio of stocks, bonds, or other securities that are directly related to the chosen theme. They offer diversification within the theme to mitigate company-specific risks.
 

Q4. What are some common themes for thematic funds?

Ans. Thematic funds can encompass a wide range of themes, including technology innovation, clean energy, healthcare advancements, demographic shifts, and sustainability, among others. The key is that the theme should be expected to impact the economy significantly.

Q5. What are the investment objectives of thematic funds?

The primary goal of thematic funds is to offer investors exposure to themes they believe will shape the future. These funds aim to capture returns by investing in companies and assets closely related to the chosen theme.