What Are Thematic Funds?

By Author: Sagar Shah
Total Articles: 5
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For many newcomers in investing, mutual funds feel like the easiest starting point. You don’t need to pick single stocks, you get a professional manager, and your money is spread across different companies. But then a big question comes – which type of mutual fund is right for me? Among the long list of options, one interesting category that often attracts attention is called thematic funds. They sound fancy at first, but actually the idea is pretty simple and can even feel exciting once you get the hang of it.

Thematic Fund: Meaning
A thematic fund is a type of mutual fund that invests in line with a broad idea or concept. Instead of just spreading money everywhere, the fund focuses on a specific theme like technology, banking & finance, renewable energy, infrastructure, consumption, or even environment-friendly companies (ESG).

The fund manager studies market trends, changes in consumer behaviour, regulations, and even global shifts. Based on this, the fund picks industries and companies that are expected to benefit from that theme. For example, if the theme is “digital India”, the fund may ...
... invest in IT companies, fintech, and even e-commerce players. If the theme is “healthcare”, the fund can hold pharma companies, hospital chains, or biotech firms.

So basically, thematic fund is like investing into one big story you believe will do well in future.

How Do Thematic Funds Work?
Thematic funds usually follow a top-down approach. First, the theme is identified – for instance, renewable energy. Then the fund manager looks at industries and sectors connected to this theme like solar, wind, EV batteries, or power distribution. After that, individual companies in those sectors are chosen.

By regulation, a thematic fund invests at least 80% of its money in companies related to the chosen theme. That makes it quite focused compared to a normal diversified equity fund. Still, it is not as narrow as a sectoral fund, because a single theme can include multiple industries.

Examples of Thematic Funds
1. Manufacturing & Infrastructure: Companies engaged in construction, cement, steel, utilities, or industrial chemicals.
2. Services: Firms that earn mainly from services like IT, telecom, and media.
3. ESG (Environment, Social, Governance): Companies that follow sustainability practices.
4. Consumption: Businesses that benefit from rising lifestyle spending, like FMCG, retail, automobiles, and entertainment.

Thematic Fund vs Sectoral Fund
People sometimes confuse thematic funds with sectoral funds. The difference is quite simple:
• Thematic funds are broader; they invest across different industries but are connected under one big theme.
• Sectoral funds invest only in one industry like just as banking or IT.

Because of this, thematic funds have slightly better diversification than sectoral funds, though still more risky than a regular diversified equity fund.

Key Features of Thematic Funds
• They target one theme or idea that looks promising.
• They spread money across different industries within that theme.
• They can invest in companies of all sizes – large cap, mid cap, or small cap.
• They are actively managed, which means the fund manager keeps adjusting based on market conditions and theme performance.

Advantages of Thematic Funds
1. Interesting exposure: You can invest in stories you believe in – like digital growth, renewable energy, or healthcare expansion.
2. Higher potential returns: If the theme works well, early investors can enjoy strong returns.
3. Diversification within theme: Unlike sector funds that are too narrow, thematic funds still spread money across multiple industries under the chosen idea.
4. Connection with trends: It feels personal because you are investing in trends you actually see around in daily life.

Risks of Thematic Funds
1. High dependence on theme: If the chosen theme doesn’t perform well, the fund suffers. For example, if EV adoption slows down, an EV-focused thematic fund can face losses.
2. Market volatility: Since most thematic funds are equity-based, they move up and down with stock markets.
3. Policy and global risks: Many themes depend heavily on government support, regulations, or global factors. Sudden changes can affect performance.
4. Not diversified enough: Compared to large diversified funds, thematic funds carry higher risk because they are tied to one idea.
Who Should Look at Thematic Funds?

Thematic funds are more suitable for investors who already understand markets a little and are ready for more risk. If someone is comfortable with ups and downs and has a belief in a particular story, then thematic funds can be exciting.

They work better if you are ready to stay invested for many years. Because trends like renewable energy or infrastructure don’t play out in few months – they take time.

Things to Keep in Mind
• Always research the theme before investing. Don’t just follow hype.
• Understand the fund manager’s track record and how long the theme may last.
• Check expense ratio and performance history compared to peers.
• Never put all money in just one thematic fund – treat it as a part of overall investing.
Some Top Thematic Funds in India (2025 Data)
• Invesco India PSU Equity Fund Direct Growth – 36.48% (3-year annualised)
• SBI PSU Direct Plan Growth – 36.36%
• Aditya Birla Sun Life PSU Equity Fund – 33.86%
• Franklin India Opportunities Fund – 33.30%
• ICICI Prudential Manufacturing Fund – 28.33%
(Data as of July 28, 2025)

Taxation of Thematic Funds: Thematic mutual funds are taxed just like other equity funds. If sold within 1 year, profits are taxed as short-term capital gains (STCG). If held for more than 1 year, then long-term capital gains (LTCG) rules apply.

Conclusion
Thematic funds are not the simplest type of mutual fund, but they surely are one of the most exciting ones. They allow investors to take part in stories they believe in – whether it is green energy, healthcare, digital economy or infrastructure. At the same time, they carry higher risk compared to diversified funds, so careful research and patience is important. For those who like the idea of investing in future trends and are ready to take some extra risk, thematic funds can add flavour and extra edge to their investment journey.