Thematic Mutual Funds: From Consumption To Pharma — Sectors In Focus

Many experts suggest being wary of thematic and sectoral funds, but there is a case for using them tactically. After all, in any given year, the best performing fund often belongs to this sub-category of actively managed equity schemes.

A long-term equity portfolio can be up to 20% invested in thematic funds, said Vijay Mantri, co-founder and chief investment strategist at JRL Money. This is a deviation from what most advisors recommend—a 10% allocation to this category.

Mantri's reasoning is based on the change in approach to portfolio construction in thematic funds. Sectoral funds, like those that represent information technology, pharmaceuticals, auto and defence, have concentrated portfolios, with a handful of stocks accounting for a bulk of assets under management.

Thematic funds, on the other hand, are more diversified. For example, a healthcare-focused thematic fund has pharmaceutical companies, manufacturers of active pharmaceutical ingredients, hospitals, and diagnostic companies. And the newly-launched HDFC Manufacturing Fund had 73 stocks at last count from a variety of sectors including auto, consumer discretionary, energy and technology, among others.

Mantri recommended having thematic funds focused on the banking, financial services and insurance sector, healthcare, manufacturing, and consumption, each with a 5% allocation.

The remainder of the equity portfolio can be made up of a combination of large and flexi-cap funds, he said.

Thematic and sectoral funds, as a category, have received tremendous investor interest over the last year. With assets under management of Rs 3.4 lakh crore as on May 31, it is now the second largest actively managed equity fund category, accounting for 13.3% of the total, up from 11.2% a year ago, according to Association of Mutual Funds data.

To be sure, the high assets under management are also a factor of the number of schemes, which are more than those offered in any other category. At the end of May, there were 162 sectoral and thematic funds, nearly four times the number of Equity Linked Savings Schemes, the category with second highest number of schemes.