What are Thematic Funds in Mutual Funds and their Types?

October 20, 2025 by Anas in Mutual Funds 0

The future belongs to those who believe in the beauty of their dreams, Eleanor Roosevelt once said. For investors, thematic funds are a way to bet on those dreams. In fact, assets in these funds have surged, highlighting their growing appeal. But what exactly are they?

Simply put, thematic mutual funds invest in a basket of stocks aligned with a long-term, structural trend. Think artificial intelligence, clean energy, or consumer spending. According to SEBI, they must invest at least 80% of assets in their chosen theme. This focused approach is different from diversified funds. It lets you potentially profit from the world’s next big transformation.

Ready to explore their types, benefits, and how they work? Let’s dive in.

Understanding Thematic Mutual Funds

Thematic mutual funds invest in specific long-term trends. These are powerful, evolving ideas like digitalization or healthcare innovation. Essentially, you invest in the future you believe in.

Furthermore, they use a “top-down” approach. Managers first identify a major trend. Thereafter, they select companies from various sectors that benefit from it. This is key. Unlike a sector fund, a single theme can include multiple industries, offering built-in diversification within the theme.

How does thematic investing work?

Thematic investing is a forward-looking strategy. It focuses on capturing growth from powerful, long-term trends. Fund managers don’t just pick companies; they first identify a major structural shift in our world. This could be a technological revolution, a big social change, or even a new government policy.

Thereafter, they employ a specific “top-down” method. This process is crucial and involves several key steps:

Firstly, they identify a powerful long-term trend. Think of concepts like artificial intelligence, sustainable energy, or evolving consumer habits.
Next, they analyze all the sectors this trend will impact. A theme like “digitalization” affects software, semiconductors, and digital banking.
Finally, they select specific companies within those sectors that are best positioned to grow from this trend.

Consequently, the fund builds a unique portfolio. It holds stocks from various industries, yet all are connected by one common story. It is important to note that SEBI mandates these funds invest at least 80% of their assets in the chosen theme. This rule ensures you get a concentrated, yet strategically diversified, exposure to your chosen vision of the future.

Sectoral Funds vs Thematic Funds: What are the differences?

Many investors confuse thematic and sectoral funds. Although both are focused strategies, their scope is very different. Sectoral funds concentrate on a single industry, like only pharmaceuticals or only banking. Their performance relies entirely on that one sector’s fortunes.

Thematic funds, however, take a broader view. They invest in a unifying idea that spans multiple sectors. For example, a “green energy” theme could include utility companies, battery makers, and cable manufacturers. Consequently, this offers built-in diversification across industries.

Therefore, thematic funds often carry relatively lower concentration risk than their sectoral counterparts. However, remember that both strategies are still riskier than diversified equity funds. They are best for investors who understand these nuances.

Different types of thematic funds

Listed below are different types of thematic funds, and you must be familiar with them to make thoughtful investment decisions. Please keep reading to learn more about them.

Dividend Yield Funds

These thematic funds focus on companies that consistently share profits. They specifically invest in stocks with a high dividend payout history.

Consequently, they aim to provide investors with a potential income stream. This strategy is popular with those seeking regular returns. However, remember that dividends are not guaranteed and depend on company profits.

PSU Equity Funds

These thematic funds invest primarily in government-owned companies. These are known as Public Sector Undertakings (PSUs).

Consequently, they offer a stake in large, established national enterprises. Sectors often include banking, energy, and infrastructure. However, their performance can be influenced by government policies and reforms. This makes them a unique, policy-driven investment proposition.

MNC Funds

This thematic fund type invests in multinational companies. These are large global corporations with Indian operations.

Consequently, they offer exposure to strong international brands and advanced management practices. Moreover, they provide a unique way to diversify geographically. However, remember their performance can be influenced by both global events and local Indian market conditions. This blend offers a distinct investment opportunity.

Energy Funds

These thematic funds focus on the vital energy sector. They invest in companies involved in oil, gas, and renewable resources.

Consequently, they tap into the constant, high demand for power. This includes both traditional fossil fuels and newer green energy sources. However, their performance can be heavily influenced by global commodity prices and government policies. Therefore, they offer growth potential but also carry specific market risks.

ESG Funds

This popular thematic strategy focuses on responsible investing. ESG stands for Environmental, Social, and corporate Governance.

Essentially, these funds invest in companies with strong ethical and sustainable practices. Consequently, they allow you to align your investments with your personal values. Moreover, they aim to identify well-managed companies for long-term growth. This approach considers a company’s impact on the world, not just its profits.

Manufacturing Funds

These thematic funds invest in companies that make physical goods. They focus on the vast industrial and manufacturing sector.

Consequently, they target businesses involved in automobiles, engineering, and infrastructure. This theme aims to benefit from economic growth and government initiatives like ‘Make in India’. However, their performance is often tied to industrial cycles and raw material costs. Therefore, they offer a direct bet on the country’s industrial expansion.

Benefits of Investing in Thematic Funds

Thematic funds offer a unique and compelling set of advantages for today’s investors. They provide a strategic pathway to move beyond traditional sectors. Essentially, they let you tap into powerful, future-ready trends that are reshaping our economy. This forward-looking approach can be both financially rewarding and personally fulfilling.

Key benefits include:

High-Growth Potential: Firstly, they provide targeted exposure to innovative, high-growth sectors. This focused approach can lead to significant outperformance, especially if the chosen theme thrives over the long term.
Built-in Diversification: Although centered on a single idea, these funds invest across multiple related sectors. Consequently, this cleverly spreads risk and is better than concentrating on a single stock.
Future-Focused Strategy: You can proactively invest in the megatrends you believe will define tomorrow. This includes areas like digitalization, automation, and sustainable living.
Personal Value Alignment: Furthermore, they allow you to align your portfolio with your personal convictions. You can directly support themes you care about, such as clean energy or strong corporate governance.

Ultimately, thematic funds offer a strategic and engaging way to potentially capitalize on the next big economic shift.

Risks associated with thematic funds

While thematic funds offer exciting opportunities, they also carry specific risks. Understanding these is crucial before you invest. Their focused nature, although a strength, is also their biggest vulnerability.

Key risks to consider include:

High Concentration Risk: Thematic funds put many eggs in one basket. Consequently, if the chosen theme fails or becomes outdated, the entire portfolio can suffer significantly.
Increased Volatility: These funds tend to be much more volatile than diversified ones. Their value can experience sharp swings based on theme-related news or sector performance.
Timing and Obsolescence Risk: Picking the right theme is only half the battle. Additionally, entering or exiting at the wrong time in the theme’s cycle can greatly impact returns.
Performance Risk: There is no guarantee of high returns. A popular theme might already be overvalued, or it may simply not perform as expected.

Therefore, these funds are best suited for investors who understand these risks and have a long-term perspective. Always read the scheme documents carefully before investing

Conclusion

In summary, thematic funds offer a unique way to invest in the future. They provide access to powerful trends and potential high growth. Moreover, they can align your portfolio with your personal interests and values.

However, remember they carry higher risks due to their concentrated nature. Therefore, they are not a substitute for a diversified core portfolio. Always assess your risk appetite and investment goals first. Conduct thorough research or consult a financial advisor to make a well-informed decision that is right for you.