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Thematic mutual funds invest in stocks linked to a specific theme. The idea is to invest in companies benefiting from the same theme. For example, a mutual fund following the theme of export and services theme will invest in stocks of sectors including banking, chemicals, technology, etc.
The objective of the thematic funds is to generate maximum returns by focusing on a particular theme.
We believe that concentration risk is high in any thematic funds and the impact of the market cycle can be severe in this category. Though these funds may have higher diversification compared to sectoral funds, this category is suitable for informed investors who are comfortable with high risks as the fund will invest in companies with the same theme. So, you should have a solid understanding of the theme before you invest in such funds. If there is a change in government policy affecting the theme, then it will impact the fund returns. Also, entry and exit timings matter in these funds, so we can not define the ideal time horizon for any particular thematic fund. Some themes may play out rapidly and others will take time. You should not allocate more than 10% of your portfolio to any thematic funds.