A strong distribution push,
coupled with investor appetite
for enhanced returns, has driven the growth of thematic funds
in India. Investors today have access to a wide variety of themes across
investment style, sector and market capitalization. It is important for investors
to be aware of the risk return trade-off and the cyclical nature of performance
for each category of theme funds. Depending on the nature of the theme, this
can be very different from diversified funds. In CRISIL's opinion, only those
investors who are willing to take the additional risk to achieve the
incremental return should make investments in theme funds. It is also important for
investors to be aware of the investment avenues for these funds to assess
their variability with other diversified funds.
Theme funds are funds that invest predominantly in securities representing
a particular investment strategy. The strategies followed by such funds
may include investment based on a particular investment style or a specific
segment or a specific sector. For example, a theme fund may invest only in
infrastructure securities, securities related to information technology, or in
securities that conform to a set of ethical standards. These funds allow investors
to invest in specific industries or sectors, which have strong growth
potential. While some theme funds can be relatively diversified, many are exposed
to the risk of a downturn in the `themed' industry impacting the fund
disproportionately. There also exist some theme funds with the underlying objective
to mitigate risk.
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