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Thematic Fund meaning: These are also known as Sectoral Funds and they are equity funds that invest mainly in stocks based on a particular theme or in a particular sector (say Real Estate sector). The benefits of investing in these funds are higher returns, tax benefits, and others. Investors with high-risk appetites can opt for Thematic/ Sectoral Funds.
What are Thematic/ Sectoral Funds
Sector Mutual Fund Definition: A Sectoral Fund is an open-ended equity fund that invests in a popular trend or a particular sector like the IT sector, Real estate sector, and others. Thus, the answer to the question of what is a Thematic/ Sector Fund is simple. These mutual funds as per SEBI guidelines need to invest at least 80% of their AUM either in a particular sector. For instance, if you choose a Sectoral Fund which invests in the IT sector, it means the fund will have 80% of its AUM invested in IT companies’ stocks. On the other hand, if you choose a Thematic Fund, it will invest in something that is popular in the market and has long-term earning potential. For instance, the electric vehicle industry is booming and it is the future of the world. So, a Thematic Fund will try to invest in stocks of electric vehicle companies.
Sector Mutual Funds or Thematic Funds focus on a particular sector. There are multiple sectors in an economy and while some of them perform highly, some others perform poorly as well. So, a Thematic/ Sectoral Fund tries to capitalize from a sector that is performing well.
Features of Thematic/ Sectoral Funds
The features of Thematic/ Sectoral Funds are:
- Different market capitalization: Thematic/ Sectoral Funds can invest across any stocks belonging to any market capitalization. This helps in diversification within the fund itself. While the Large-cap in the Thematic/ Sectoral Fund can provide stability, the Small-cap can bring in some exponential profits as well.
- Multiple sectors: For a Thematic/ Sectoral Fund manager, there are ample options to choose from. He or she can choose the best performing sectors to invest in the AUM.
- Hidden gems: Often retail investors cannot spot hidden gems in not-so-popular sectors. However, fund managers handling Thematic/ Sectoral Funds often track stocks that have the potential to provide huge returns.
- Higher returns with higher risk factors: If the sector in which your Thematic/ Sectoral Fund invests outperforms, you can earn huge returns. However, if it performs poorly, it can directly affect your investment.
Who Should Invest in Thematic/ Sectoral Funds
Thematic/ Sectoral Funds are suitable for people:
- Who are active investors and know the macro-economic situation of different sectors.
- Who is willing to stay invested even when the market is highly volatile.
- Who is willing to invest for at least three years to five years.
What is the Minimum Amount Required to Invest in Thematic/ Sectoral Funds
The minimum amount you would require to invest in these funds can be Rs. 500 if you invest via SIP. If you go for lump sum investment, then the minimum investment will be around Rs. 5,000. However, the minimum investment varies from one scheme to another. While choosing the fund, you need to check the minimum investment requirement.
Factors to Consider Before Investing in Sector Mutual Funds
The factors which must be considered while investing in Thematic/ Sectoral Funds are as follows:
- Downside risk factor: Thematic/ Sectoral Funds are concentrated funds where the money is invested in a popular trend or particular sector. So, if the trend reverses or the sector performs poorly respectively, then the fund will decrease its value as more or less all the stocks in the fund will get affected. So, while investing in these funds, you need to keep in mind that these are high-risk investments. Make sure you are willing to take the risk.
- Investment goals: You need to have clear investment goals which must be aligned with the objectives of the fund you invest in.
- Knowledge about the particular sector or industry: Investing in Thematic/ Sectoral Fund requires good research and analysis of the market, economy, and sectors and this will help you mitigate risk as well by choosing the right scheme.
Advantages of Thematic/ Sectoral Funds
The advantages of Thematic/ Sectoral Funds are as follows:
- Investors can earn inflation-beating returns if the sector outperforms
- Since stocks from any company irrespective of its market capitalization can be added to Thematic/ Sectoral Funds, this provides the ground for diversification and mitigating risks.
- For long-term financial planning, Thematic/ Sectoral Funds can be a great option too.
Tax Implications on Sector Fund
Thematic/ Sectoral Fund is an Equity Fund and thus the tax is imposed as per:
- Short-term capital gain tax @15% if you stay invested for less than equal to one year
- Long-term capital gain tax @ 10% if you stay invested for more than one year. In this case, profit is taxable only if it is more than Rs. 1 Lakh. However, there is no indexation benefit.
How to Invest in Sector Fund through Nivesh
Any investor can enjoy the benefits of investing through Nivesh in the following easy steps:
- Create an account in Nivesh by providing your basic KYC details. (If you already have an account then just login into your account)
- On your portfolio page click on the Buy New tab at the right top corner of the screen.
- Select the category and choose the funds you want to purchase.
- If you already know the name of the fund to buy, then you can search the particular fund through Quick Order.
- Fill the transaction details and confirm. You can place up to 5 orders in one go.
- You can make payment through your registered account through UPI, Direct Pay, or NEFT/ RTGS , Bank Mandate or Cheque. For same-day NAV, select UPI, Direct Pay or NEFT / RTGS as other payment options may take a few days to clear, Nodal account takes about 1-2 days to clear payment from the approved mandate and cheque takes about 2-5 days in clearing due to which you will not get the same-day NAV.
Frequently Asked Questions (FAQs)
1. Are Thematic/ Sectoral Funds Risk-Free?
No, there are some downside risks associated with these funds. However, careful analysis and research for choosing the right theme or sector can minimize a lot of risks.
2. What is the Minimum Amount to Invest in Thematic/ Sectoral Funds?
You can start investing with Rs. 100 as well via SIP. However, the minimum investment amount varies from one scheme to another. For lump sum investment, the minimum investment amount is usually Rs. 5,000.
3. How Long Should you Invest in Thematic/ Sectoral Funds?
For reaping the benefits of these funds, you should stay invested for at least 3 years to 5 years. These funds are for long-term investment purposes.
4. Can we Withdraw Thematic/ Sectoral Funds Anytime?
Yes, these are open-ended equity funds. You can withdraw from these funds at any point in time. However, you need to consider the exit load before you withdraw.
5. Is There any Tax on Thematic/ Sectoral Funds?
Yes, capital gain taxes need to be paid on the profits you make from the funds. If you hold the fund for 1 year or less then short-term capital gain taxes @15% would be implied.
If you hold the fund for more than 1 year, then you will be paying 10% long-term capital gain tax for profits over Rs. 1 Lakh.
