What's Driving Demand For Thematic Funds? | The Mutual Fund Show
Category
🗞
NewsTranscript
00:00Welcome. You're watching the Mutual Fund Show. I'm Tamannaa Inamdar. And today we're going
00:11to be talking about a kind of fund which is definitely one of the hottest and most in
00:18demand since the last several months. In fact, in the last 12 months or so, these kinds of
00:24funds have seen a substantial surge in the money coming in. We're talking about thematic
00:30funds. 31% of all inflows have been in thematic funds, over 70,000 crore rupees in just the
00:37last 12 months. Now, why are we talking about it today? And what are the concerns? Well,
00:43concern number one is that when you're looking at markets at all time highs, like we are
00:48right now, do the risk factors for thematic funds grow? Because remember, these are funds
00:55focusing on very specific and narrower ideas, and sometimes require action from the investor
01:04to rotate out. Would you be missing the bus, is the question. For a market that is in a
01:10bull run trajectory and at all time highs or nearing all time highs, are you safer off
01:17in a diversified fund? That's the essential question that we're placing in front of our
01:21guests today. And to speak on this, I'm joined by Shruthi Mahajan of Complete Circle World
01:25Solutions. Mrin Agarwal of InSafe India is also with us today. Welcome to both of you
01:31and great to have you on the Mutual Fund Show. As always, I'll start with Mrin. Mrin, just
01:35your opening comments on the theme that I have set up, the context I have set up in
01:41the beginning of the show about thematic funds, why they're popular and why should we be
01:47talking about them right now?
01:49Good afternoon, Tamanna, and thank you for having me on the show. Well, I think, firstly,
01:56I think investors are very taken in by the narratives that one is seeing around certain
02:02themes, let's say, you know, whether it's defence, PSU, manufacturing, right? And again,
02:09the risk appetite has also increased. And the fact that people are thinking that, you
02:15know, they can make returns like how they're making in mid caps and small caps. So I think
02:19it's really a question of the narratives that one is hearing around these particular sectors
02:24or themes that is getting people to really invest in these funds, of course, also driven
02:30by the fact that some of these indices have shown very good performance as well.
02:34All right, let me take that to Shruthi as well. Shruthi, thematic funds, first of all,
02:41let's start with why they're so popular.
02:44So, you know, thematic funds, so normally what happens when you have ongoing rally for
02:53last four years, which is going and people see that, yeah, normal mutual funds are giving
02:58a return, how we can create some additional delta in the portfolio to end up buying, you
03:03know, some different category of funds, whether thematic or maybe sectoral funds coming to
03:07play. So I think why it's getting popular, because it is a better way of playing a sectoral
03:13team rather than just playing a sectoral team. You end up buying a team on which you
03:18are bullish and you end up getting into three, four, five different sectors. Let's take,
03:23for example, let's say you're bullish on housing as a theme. Now, housing is a bigger theme,
03:28but you end up playing on a housing theme. You will have, say, you will have steel, you
03:35will have security systems, you will have times, you will have times, you have different,
03:39different, various other sectors, which comes into play. Similarly, let's say if you are
03:43bullish on a theme, which is like a power theme, so that, that includes power generation,
03:48power distribution, that includes, so clean power companies like, companies like your
03:56Praj industries, which is working on ethanol side of power. So there are many different
04:00things, which, which as a team, you can buy when you have a thematic fund, which will,
04:06which restricts you for doing that in a, in a given sectoral application. So I think that's
04:11why these set of funds are getting popular and you have seen the type of growth that
04:15you have mentioned in your initial opening statement. So I think it's a better way of
04:22playing and creating some additional data vis-a-vis your Flexicap or Feticap funds.
04:27Okay. Okay. So that's why people are interested in thematic funds and frankly, look at the
04:31whole rush of NFOs and, you know, new products that mutual fund industry is also launching.
04:37A lot of them are thematic funds, whether it's EVs, defense, public sector companies,
04:43everything that is in focus. Now let's talk about the risk factor over here, Amrita, and I'll come
04:47to you on that. And I mentioned this briefly, but the fact that markets are right now at all-time
04:54highs. Does it become important to rotate out and to look at thematic funds more closely as
05:03an investor? You have to pay closer attention than you would, for example, to a diversified fund.
05:08Would that be fair to say? Yes, absolutely. Because in thematic fund, you are basically
05:15betting that the theme is going to work out over a period of time. So certainly you do have to
05:20watch out for the exit signals or you do need to have an exit strategy in place.
05:27Certainly these are not meant for long-term investing. And the reason for that is that,
05:33you know, when you look at sectoral performance every year, the best performing sector keeps
05:38changing, right? So even if, look, you know, I'm sure that even if we were to plot the themes every
05:45year, the best performing theme is also going to keep changing every year. And hence, you know,
05:49for most investors, it actually becomes really difficult to figure out, you know, when do you
05:54actually exit and especially if, you know, the theme doesn't perform well. So the classic example
05:58is, of course, of 2020, where pharmaceutical stocks did really well, but that was not the case
06:03in 2021 and 2022. And most investors who got into these pharma funds were not sure as to what to do.
06:10So I think, you know, the very important thing in thematic funds is really that the theme needs
06:16to play out on several aspects, right? So first of all, you know, all the stocks need to work out
06:22in these funds because they are certainly concentrated, right? And many times all the
06:26NFOs that you see come after the theme has already given some really good returns. So, you know,
06:31markets may have already priced in this particular trend. And the fact is that, you know, this theme
06:37should actually play out in the future, right? So it could already be that a lot of it has been,
06:43has already played out and there's very little steam left. So there are certainly a lot of risks
06:48involved. And hence, you do need to ensure that you are exiting, you are certainly planning for
06:53the exit at the appropriate time. So how do you stay aware? How do you stay aware on thematic
07:01funds, Shruthi? And how do you make sure you're not trying to catch a train that has already left
07:06the station? That, you know, if there is now a new fund on a theme that's already run up,
07:12you're not late to the party. So first, I think the allocation which one should look at,
07:18you know, going towards thematic or I say that tactical allocation is 10-15%
07:24on a higher side. Second, as you said, when you already have a theme which is playing and
07:29now you have funds coming, one has to actually look at the gap between the valuation and
07:36the earning numbers which are coming, which I'm sure is not possible at investors end.
07:40So what you can do is look at the type of performance this sector or this theme has
07:44given in the past and look at the longevity of sector which is doable. Take for example,
07:49if let's say government focuses clearly on defence and manufacturing. So now normally
07:53the sector which you feel looks like to be a sectoral fund on the manufacturing side,
08:00it can become a long-term evergreen, you know, sector also. Because when you are stepping up
08:05your manufacturing capabilities, then you can see that maybe it's no more a sector but it can
08:10be a long-term allocation also. But on the defence side, when you see there is a reasonable, not
08:16reasonable but a sharp movement in last couple of years and right now if you're looking at
08:21participating in a defence fund, then you have to just pick your bets rightly because whether you
08:26are at the peak of a cycle or you still see that some bright news coming on your way about the
08:31business which you are buying in underlying sector. This is just an example I'm saying.
08:34So I'm saying, yes, I totally agree with what Varnad is saying that, you know, if you are almost
08:41at the peak of a sector, then you should try to refrain away from investing into that fund. And
08:46as you watched, nobody knows what is the peak of a sector but yes, if there is a sharp movement
08:51already in that theme or sector, then one can refrain away from that sector. But if you still
08:56feel and you can talk to the right people, you know, that there is a lot of use left in that
09:01sector or that theme which you are going to buy or get into, then once you look at that,
09:10can this be a long-term investment for you or not? Like I said, manufacturing I feel can be a
09:15long-term investing for people as a theme because India is starting up, it's building a manufacturing
09:21base in a very strong way and we are targeting 45% of contribution to GDP by manufacturing in
09:27the next five to six years' time. So just an example, there is no sale of a manufacturing
09:32fund here but yes, it is just an example. Okay, so manufacturing is a good example. Let me come
09:38to you, Mrin, on that. What are the examples of thematic funds or the top thematic funds
09:42which you think are worth looking at right now? What is the kind of allocation you should have
09:48to thematic funds? Should it be part of your core portfolio or more of a satellite or a secondary
09:54portfolio? Give us your views on some of these points. Well, firstly, I don't recommend thematic
10:01funds at all and the reason being extremely concentrated and the point is that whatever
10:06are the high conviction bets from these themes are anyway going to be there in the broad-based
10:11funds, right? So, you know, you don't really need to have this concentrated bet, you can play it
10:16through the existing broad-based funds which could be part of the core portfolio. That said, of course,
10:23if there is, you know, you believe in a particular theme and you want to take some
10:28concentrated exposure, of course, you can look at, you know, up to let's say five to ten percent
10:32across these themes, not in one particular theme but, you know, I think for that the investor really
10:38needs to have very high conviction on this particular theme and possibly a good amount of,
10:43you know, domain expertise on the theme to really decide whether to actually get into this or not,
10:49right? So, hence, I don't really suggest any of the existing thematic funds. Also, when you look
10:56at the past returns, right, of thematic funds and, you know, see for an investor today you can decide
11:01to do a thematic fund or you could decide to just go with an 50-50 index fund or a S&P 500 fund,
11:08right, BSE 500 fund, for example. So, you know, when you look at the way the returns have done
11:14and also when you look at things like downside capture ratios being very high on these particular
11:18funds, that's another reason why I actually don't recommend investment in these particular funds.
11:24Okay, that's a very clear stance there from Rin that no thematic funds,
11:29you don't really need them. Would you say that, Shruthi, or you'd make some exceptions?
11:35So, I respect what Mrinal is saying. All I'm saying is that some themes which looks evergreen
11:40now, like, you know, what we used to call FMCG and banking is evergreen sector or theme which
11:45will always remain a country where which is growing at a nominal GDP of 12 percent, you'll
11:49see BFS side will grow at 15 percent. So, I'm saying right now your banking as well as manufacturing
11:55looks like to be an evergreen theme for me from here onwards. So, we don't mind allocating some
12:04funds on the banking side or on the manufacturing side for clients who understand that if there is
12:09additional data, there is additional risk also when you get into a thematic side of funds also.
12:14That's why you receive them in 10 to 15 percent of their overall allocation in their portfolio.
12:20But yes, you know, these two themes looks like good. Other themes which are there in the market,
12:26with all due respect, I see that there is a massive valuation mismatch, whether it's PSUs
12:32or whether it's a defense, you know, there's a valuation mismatch which one has to look into
12:38before investing into. But yes, there are certain buckets there also where you still have some
12:44a certain headroom remaining for you to grow. Kiran writes in to us, aged 42, and the goal is
12:52to create a corpus of up to one crore rupees. They write that I have a 7000 rupee SIP
12:58in three funds and want to invest 20,000 rupees additionally per month. Can you recommend a few
13:05funds? They've also shared their current investment program, Quant Mid Cap, Quant Small Cap and Parag
13:13Flexi Cap. So pretty much everything is covered, I would say. But if there has to be an additional
13:19bump up, which is a substantial one, going from 7000 rupees to 27000 rupees per month,
13:25where should this money come in? So already there is a Flexi Cap, Mid Cap and Small Cap. And I think
13:33you know, one of the things that they can possibly do is to add in an index fund, maybe
13:37like the Nifty 50 index fund of ICICI. And then maybe look at allocating, spread out some
13:44allocation among the existing funds itself. Of course, I think between Quant Mid Cap and Small
13:50Cap, there would be a good amount of overlap of stocks. So maybe like just choose one of those
13:55funds instead of both of them. One of those funds instead of both of them. Shruthi, let me come to
14:02you. Where would you put an additional 20,000 rupees? Does it make sense right now to look at
14:07a large cap fund? Sorry, a large cap fund. Does it make sense to look at a large cap fund for
14:18these additional investments? So I think index fund can be looked at and what one can look at
14:26is I think next Nifty also you can include. But one request, if he actually is already having
14:32going in Quant Funds for the time being, you know, we have some issues going on about some
14:39investigation going on. They can stop this thing for the time being. There's no need to redeem that
14:43money. Just let the money lie there. And add the one Nifty index fund and couple of Flexi Cap Fund
14:49is what I advise. Because this is something, this might take some time, this entire inquiry.
14:56So I think one can look at Nifty 50 or next Nifty 50 and choose one of Flexi Cap Funds,
15:02good Flexi Cap Funds option which are available in the markets. Okay, more Flexi Cap Funds is
15:07something you can choose. Shyam writes in aged 20 says I want to invest 2000 rupees a month in
15:13mutual funds for the next one and a half years. Can you suggest a few funds? First of all,
15:17congratulations Shyam. You deserve a separate award at the age of 20 to be thinking about
15:22investments in mutual funds. And the fact that you're starting from 2000 rupees a month,
15:27that's fantastic. I don't know why just one and a half years? It's something Shyam can't
15:32answer right now. But if you're watching, please write in and let us know. Mrin,
15:36one assumes there should be a longer term investment that begins for a 20 year old,
15:41they're just starting out. But if I were to just guesstimate and say that this is for a specific
15:48purpose that Shyam wants to invest in, and that goal accumulates in one and a half years,
15:53then what should be the right options? A little more aggressive perhaps?
15:58Well, I think he should look at ultra short duration debt funds or arbitrage funds,
16:04or a combination of both simply because equity funds are going to be too volatile in that
16:09particular period and the same hold goods for balance funds as well. So my recommendation
16:14would be an ultra short duration debt fund and an arbitrage fund. The arbitrage fund simply because
16:20he does have the one and a half year time frame and it does give you a tax advantage as well. So
16:27I think combination of these two would be good. Okay. What would be your advice, Shruthi, for Shyam?
16:35Anez, if he's looking at redeeming this money after one and a half years,
16:39I agree with what Niranjan is saying. But if he wants to invest for one and a half years and wants
16:44to continue that purpose for long, then he can look at a focus fund on a multi-cap fund because
16:50he's young. He can look at a focus fund on a multi-cap fund. But yes, I'm very happy that
16:55someone at 20 years of age is thinking about investing in a mutual fund. Congratulations
16:59to Shyam. At the same time, just to understand the power of compounding to all our viewers,
17:06if you are investing 2000 rupees also and you invest for the next 30 years with an incremental
17:11support of 10% every year, you end up making 1.76 crore in 30 years if you grow your money at 12%.
17:20So I'm saying that's the power of compounding what type of corpus you can create with 2000
17:24with 10% increment every year. So Shyam, if you're not working, as in when you start working,
17:32look at a wider spectrum of three, four, four mutual funds on multi-cap and tax cap side and
17:38start your SIPs. All right, Lata Venkatesan writes to us. I recognize that name. Lata,
17:44I love it that you watch our show and you come in with your queries so often.
17:47So you're a regular, age 64, goal is lump sum returns. And she asks, can you explain the term
17:55IDCW? Can we switch our existing funds from growth to IDCW? Is this beneficial
18:02for senior citizens? Goes on to say, I invested 61 lakh rupees. Am I reading that correctly? Yeah,
18:10in total in ICSA fund and HDFC balanced advantage fund. Now, IDCW is a scheme where you can withdraw
18:19money in a consistent fashion from your mutual funds. But I'll leave it to Mrin to explain this
18:24and why this is a good option for senior citizens. Let me just add one more layer to that.
18:30How do you compare it to an SWP, a systematic withdrawal plan? Which one works better?
18:37So ICDW stands for income distribution cum capital withdrawal. And so it's a form like
18:44to say it in a more layman language, maybe dividend is an easier way for people to understand
18:49it. So you can switch from growth to ICDW, but remember that when you do the switch,
18:56there will be a tax implication because it is a switch from a fund with one NAV to a different
19:02NAV. And it's a different, like they're basically two different funds, right? Since they have
19:07different NAV. So there is going to be a tax implication if you do intend to do this. Now,
19:12I'm presuming that both the funds that you're having are balanced advantage funds. And the
19:17thing that you need to remember is that if you're doing this to get regular income, then you must
19:22remember that the, whether it is balanced funds or equity funds, while they do declare dividends
19:27regularly, there is no fixed thing that you are surely going to get that dividend or not, because
19:33it all depends upon the performance of the fund. Unlike the case of debt funds where, you know,
19:38you do have more surety of getting a regular dividend, even though that amount is not going
19:44to be like a guaranteed fixed amount, right? So, you know, what I would actually say is that
19:52ideally, if you are looking at trying to generate a regular income from these investments,
19:58it should ideally be done like a systematic withdrawal plan from mutual, from debt funds,
20:04right? So what is the difference? So ICDW is basically like a dividend that gets declared,
20:09whereas SWP is a systematic withdrawal plan where you are withdrawing units from your investment,
20:16and you can decide whether to do it on a fixed amount or a fixed number of units, basically.
20:21So that's what the difference is. Okay. Okay. And in terms of an option for senior citizens,
20:28she wants to know if she should switch out from a growth fund into the IDCW option,
20:35what would you say to that, Miran? Not in the balance fund, right? Because
20:40they mentioned it's not going to give you that, you don't have that surety that there's going to
20:44be a dividend that's going to come out every quarter. Okay. So let me get that question to
20:49you. And I think I'd like to know your version also of how you would describe these funds.
20:53Are they popular? Should it be an option everyone should look at?
20:59So, Tamara, I think the only difference for what Vinod has said is that if you don't have
21:06a tax liability, or let's say if you're not in a tax lab, then you can look at a dividend option.
21:11And if you don't, you don't need a regularity of income on a monthly basis, because if dividend
21:17is like taken as full tax now, it's on the tax lab, it's like your interest income. So then
21:23if you don't in any tax lab, you can look at a dividend income as an option. But if you're in
21:28tax lab, I think tax-wise also, SWP, any day and regularity wise also, SWP any day is a much better
21:36tool. It's actually a tool which can make things much better for you in terms of your monthly
21:42payouts. So I think SWP is something which has been looked by many of the retirees, clients for
21:49in our scheme of things also. And it's a beautiful tool where you can decide on
21:53whatever amount you want to withdraw on a monthly basis and you can plan your things so that your
21:59investment still keeps on going and still you keep on enjoying the fruits and benefits of the returns.
22:04All right, very quickly, let's quiz in one more query before we have to wrap up the show.
22:08This is a question from Rabilal Chhetri, I hope I'm saying the name correctly, 35 years of age,
22:14goal is high returns. Says they are currently investing 10,000 rupees a month in SBI Energy
22:20Opportunities Fund, direct growth. Wants to know if it's the right fund or should they diversify
22:26my portfolio further? I mean, a one fund portfolio I think is, and that too in a specific theme like
22:33that. I don't know, Mrin, what would you suggest? Well, I think he himself has a doubt on it, right?
22:38So I think he needs to diversify his investment. Yeah. As I said, I'm not in favor of themes at
22:44all. So I would actually say exit this and look at restarting a SIP in a more diversified fund.
22:51I mean, of course, since your goal is high returns, you could consider small cap funds provided you
22:56can take the risk. Otherwise you have mid cap or flexi cap categories available. But certainly
23:01you cannot just have one fund in the portfolio. You do need to diversify. And by diversifying,
23:07you mean diversify among sectors and stocks. So certainly do not look at thematic or
23:12sectoral funds for the same. Don't put your eggs in one basket. Don't put all your money
23:16in one fund and perhaps not a thematic fund if you want to just choose one. We'll have to wrap
23:22it there. But thank you so much, Ritej and Mrin, for joining us today. And for all our viewers,
23:26thank you for tuning in. If you want to write in to us, you want to hear the answer to your
23:30queries from our experts, all the numbers on your screen. That's all the time I have today
23:35on the Mutual Fund Show, but stay tuned. A lot more coming up on the other side on NDTV Profit.
23:42Thank you so much, Ritej and Mrin.