Both sectoral funds and thematic funds are high risk investments. Before investing money in them, it is important to understand the advantages and disadvantages associated with them.
Sector Fund vs Thematic Funds: When mutual funds are invested in a specific sector, they are called sectoral funds. In this, investments are made only in those businesses, which work in a specific sector or industry. For example, under sector funds, investments are made in many other sectors including banking, pharma, construction or FMCG. On the other hand, thematic funds are those which invest in stocks based on a particular theme. The theme chosen by such funds may revolve around sectors like rural consumption, commodities, defence. For example, a thematic fund may focus on rural consumption and invest in funds from all sectors under this theme. The major difference between these two funds is that sectoral funds invest in only one sector, whereas thematic funds invest in multiple sectors, which are based on a common theme.
what are sectoral funds
Sectoral funds are known to invest only in specific sectors like pharma, construction, FMCG. As per the guidelines laid down by SEBI, it is necessary to invest at least 80% of the assets in a sectoral fund in specified sectors. The remaining 20% can be allocated in other debt or hybrid securities. Sectoral funds can be of different types. This market capitalization, investment objective and set of securities can vary.
Under this fund, investments can be made in many sectors like natural resources, utilities, real estate, finance, health care, technology, communication. Some sector funds also focus on sub-categories like banking. Sector funds are ideally suited for active and educated investors who often analyze the macro-economic situation of multiple sectors.
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What are thematic funds
Thematic funds are those which invest in stocks based on a particular theme. These funds invest in sectors that follow a specific theme. As per SEBI guidelines, thematic funds have to invest 80% of their assets in stocks of a particular theme, across sectors. In terms of number of stocks and portfolio constructions, thematic funds are as diversified as equity schemes. Thematic funds invest in various sectors including multi-sector, international exposure, export oriented, rural India with different themes. These funds are considered riskier as compared to diversified equity funds or large cap equity funds.
Thematic fund investors should take at least 5 years to enter and exit the scheme and allow the fund to perform positively. It is suggested that only investors with moderately high risk appetite should consider investing in thematic funds.
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What is the difference between Sectoral Fund and Thematic Fund?
- Sectoral funds invest in specific sectors, whereas thematic funds invest in different sectors depending on the theme.
- The risk in sectoral funds is very high, whereas in thematic funds, the risk can be moderate to very high.
- Talking about the returns, the returns can be very high in both the funds.
- Talking about volatility, the volatility in sectoral funds as well as thematic funds is very high.
- Experts say that one should invest in sectoral funds for 3 to 5 years, while thematic funds should be invested for 5 to 7 years.
- No diversification is offered in sectoral funds, whereas diversification is done between sectors in thematic funds.
- Experts believe that those who have good knowledge of specific sectors should invest in sectoral funds. At the same time, investors who have a good knowledge of the theme should invest in thematic funds.
- Talking about asset allocation, in sectoral funds, 80 percent of the assets have to be allocated in specific sectors. At the same time, thematic funds have to invest 80% of their assets in stocks of a particular theme, in different sectors.
It is important to keep these things in mind
- It should be noted that both sectoral funds and thematic funds are highly risky funds as an investment option.
- Experts suggest that each of these funds should not exceed 5-10% of your portfolio, considering the level of volatility.
- While investing, you should keep your portfolio diversified across multiple large cap and mid cap funds.
- Since both these funds depend on the performance of the sector, the chances are high that your portfolio will face volatility in both bullish and bearish markets.
- Investing in sectoral and thematic funds is better for only those investors who are active and have a clear understanding of the market and macro-economic conditions.
(Input – Paisabazar.com)
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