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growth. These funds can outperform more diversified invest across a wide range of sectors and asset classes.
funds during periods when the theme or sector is in This diversification helps reduce risk by spreading
favor. investments across different areas of the economy.
3. Alignment with Personal Values: Thematic funds, Thematic and sectoral funds, in contrast, concentrate their
investments in a single theme or sector, which can lead
especially those focused on ESG criteria, allow
to higher returns during favorable conditions but also
investors to align their portfolios with their personal
higher risk during downturns.
values. Investors who prioritize sustainability and
ethical investing can choose funds that focus on
companies with strong ESG practices. Key Differences:
Investment Focus: Diversified funds aim for broad
4. Portfolio Diversification: While thematic and
exposure across various sectors, while thematic and
sectoral funds are not diversified in the traditional
sectoral funds focus on specific sectors or themes.
sense, they can be used to complement a broader
portfolio. For instance, an investor with a well- Risk and Return: Diversified funds generally offer
diversified portfolio may add a thematic fund to gain lower risk and more stable returns, whereas thematic
exposure to a specific growth area without overhauling and sectoral funds have the potential for higher
their entire investment strategy. returns but come with higher risk.
Investor Suitability: Diversified funds are suitable
Risks of Thematic and Sectoral Funds for most investors, especially those with a lower risk
1. Concentration Risk: The biggest risk associated tolerance. Thematic and sectoral funds are more
with thematic and sectoral funds is concentration risk. appropriate for investors with higher risk tolerance
Since these funds focus on a specific theme or sector, and a strong conviction in a particular theme or sector.
they are more vulnerable to adverse developments
in that area. For example, a healthcare fund would Case Studies of Successful Thematic Funds in
be significantly impacted by negative regulatory India
changes in the healthcare industry.
To understand the potential of thematic and sectoral
2. Volatility: Thematic and sectoral funds tend to be funds, let's explore some case studies of successful funds
more volatile than diversified funds. The performance in India:
of these funds is closely tied to the fortunes of the 1. Technology Sector Fund
underlying theme or sector, making them more The technology sector in India has been one of the
susceptible to market swings. most dynamic and rapidly growing sectors. A leading

3. Timing Risk: Successfully investing in thematic and technology-focused mutual fund in India has delivered
sectoral funds requires accurate timing. If the theme exceptional returns over the past decade, driven by
or sector does not perform as expected, or if the the exponential growth of IT services, software
investor enters or exits the fund at the wrong time, development, and digitalization. Companies like
the investment may not yield the desired returns. TCS, Infosys, and Wipro have been key contributors
to the fund's success, benefiting from the global
4. Limited Diversification: Unlike diversified funds,
demand for technology services.
thematic and sectoral funds do not spread
investments across various sectors, which means they Performance Example: Over the past five years,
lack the cushioning effect that diversification provides this technology fund has consistently outperformed
during market downturns. broader market indices, delivering an average annual
return of 15%, compared to the Nifty 50's average
How Thematic and Sectoral Funds Differ from of 12%. The fund's success has been driven by its
Diversified Funds strategic investments in leading tech companies and
Diversified funds, such as multi-cap or flexi-cap funds, emerging startups in the fintech and AI spaces.

48 | 2024 | SEPTEMBER | BANKING FINANCE