Which thematic mutual funds should I invest in 2024?
-Name withheld on request
Thematic funds are typically risky as they are cyclical. They tend to perform well in certain periods but could perform poorly for extended durations. We’ve witnessed themes like infrastructure, which have been highly affected during market downturns. Similarly, other themes like pharma can remain dormant for lengthy periods. While these plays entail risk, the past 12 months have shown that they can also yield significant rewards if tactically invested in and timed correctly. PSUs, railway stocks, and infrastructure private banks have notably excelled in the last month.
Many of these themes align with mid and small-cap stocks, which have also displayed remarkable performance. Infrastructure and manufacturing-themed funds have returned between 40% and 53%, while PSU funds have yielded an impressive 50% to 60%. In this context, the BSE Small Cap Index surged around 50%, and the mid-cap index by approximately 43%.
As a prudent financial practice, investments in thematic funds should be made by aggressive investors who can tolerate substantial downturns and prolonged underperformance. Ideally, no more than 10% of the portfolio should be in any single theme, with the total thematic exposure not exceeding 25%. Sectors like banking and financial services are already prominent in most diversified large and flexi-cap funds. Predicting the future, especially in thematic and sectoral funds, carries inherent risks. However, considering the current market landscape, themes like PSUs, pharma, and private banks seem poised to continue their positive performance.
In certain themes like pharma and banking, Systematic Investment Plans (SIPs) can be an effective way to navigate their inherent volatility over mid to long-term periods. When selecting a thematic or sectoral fund, consider factors such as the fund’s size, the fund house’s track record in managing equity schemes, and the diversification among stocks in that space. Only consider investing if these criteria are met, based on the specified maximum percentages, and after consulting with a financial advisor to align with financial goals. Thematic and sectoral funds should be invested in for goals extending beyond 5 years at a minimum. Regular monitoring is advisable to capitalize on short to medium-term upsides, if necessary.
Vivek Banka is co-founder, GoalTeller,
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Published: 27 Dec 2023, 11:33 PM IST