7 Thematic Mutual Fund Themes: Thematic funds have gained investor attention, with schemes focused on areas such as defence, manufacturing, infrastructure, healthcare and consumption attracting growing interest.
However, experts caution that investors should not enter thematic funds by simply looking at past returns. Unlike diversified equity funds, thematic funds require investors to understand the underlying theme, market cycles, valuations and the right exit strategy.
Speaking on thematic funds, experts said these funds can generate strong returns when the theme plays out well, but they can also witness sharp corrections if investors enter at the wrong stage of the cycle.
What are thematic mutual funds?
Explaining the concept, Kshitiz Mahajan, Managing Partner & CEO, Complete Circle Wealth Solutions LLP, said thematic funds are built around a specific theme and invest in companies that benefit from that theme.
“A thematic fund is basically built around a theme, and all the businesses connected to that theme are bought,” Mahajan told Zee Business.
He explained that investors often confuse sectoral and thematic funds.
Giving the example of defence, Mahajan said defence is a sectoral fund rather than a thematic fund as it focuses on one specific industry.
“In defence, you have companies involved in aircraft manufacturing, technology providers, Pinaka rocket manufacturing, gun manufacturing and many other areas,” he said.
A theme, however, has a broader approach and can include companies across multiple sectors.
For example, the data centre theme does not only include companies operating data centres but also businesses involved in high-density cables, cooling systems, water solutions, EPC companies, batteries, transformers and other related areas.
“So, you are playing the entire theme. A theme is a wider approach where multiple sectors can come under it, while a sector is specific to one industry,” Mahajan added.
1) Defence theme: Long-term opportunity, but valuations remain a concern
Defence has been one of the most discussed themes among investors, especially after strong performance from defence-focused funds and stocks.
However, experts warned investors against entering the theme only after seeing high returns.
Speaking on Zee Business, Mohit Gang, CEO, Moneyfront, said investors should not become performance chasers in thematic funds.
“Never become a performance chaser in thematic funds. Do not enter a theme just because it was the best-performing theme in the last one year,” Gang said.
Discussing defence funds, he said the sector has strong long-term potential, but investors need to consider valuations.
“Defence company valuations are sky-high. A lot of the growth expected over the next two-three years has already been factored in,” he said.
At the same time, he added that increasing global defence spending and India’s focus on self-reliance could support the sector over the long term.
“Defence can be an evergreen theme for the next five to ten years. Investors can gradually build exposure through SIPs,” Gang said.
Mahajan highlighted that many investors entered defence funds after seeing exceptional returns.
“People saw that equity markets can give such returns and that is where mistakes happen. After that, the sector went through a two-year period before the trend returned,” he said.
He added that investors need patience and temperament because thematic funds can go through extended periods of underperformance.
2) Manufacturing theme: A long-term India growth opportunity
Manufacturing emerged as another major theme discussed by experts.
Gang said manufacturing has become a long-term theme due to government initiatives around self-reliance and domestic production.
“Manufacturing is a very broad theme. Investors need to be selective and understand the underlying companies and sectors before investing,” he said.
He explained that manufacturing can include several segments such as:
- Defence manufacturing
- Industrial manufacturing
- Infrastructure-linked manufacturing
- Capital goods businesses
The key question for investors, according to Gang, is whether India’s manufacturing sector can see a sustainable revival.
“Will manufacturing’s contribution to GDP increase? Will we see new investments and new companies? These are the questions investors need to answer before investing in a theme,” he said.
Experts also pointed out that different mutual funds may define the manufacturing theme differently.
“For example, some manufacturing funds include banking companies because banks provide credit to manufacturing businesses, while some funds completely avoid banking and focus only on manufacturing companies,” Gang said.
He advised investors to understand the portfolio construction and sector allocation before investing.
3) Data centre theme: A wider digital infrastructure opportunity
Data centres were highlighted as an emerging theme with exposure beyond just data centre operators.
Mahajan explained that investing in the data centre theme means looking at the entire ecosystem.
- High-density cable manufacturers
- Cooling solution providers
- Air-conditioning companies
- Water management businesses
- EPC companies
- Battery manufacturers
- Transformer makers
According to experts, this is an example of how a theme can include multiple sectors rather than one specific industry.
4) Infrastructure theme: Power, capital goods and economic growth
Infrastructure was discussed as one of the broadest investment themes.
Experts said infrastructure funds can have different investment approaches.
Some funds may include banking stocks because banks finance infrastructure growth, while others may focus mainly on power, capital goods and energy companies.
Gang explained that investors should understand whether a fund is focused on:
- Banking and financial support for infrastructure
- Power and energy companies
- Capital goods businesses
- Broader economic infrastructure growth
He said investors should study the fund strategy and portfolio before making an allocation.
5) Healthcare and wellness theme: Hospitals, diagnostics and pharma
Healthcare and wellness emerged as one of the themes experts said they remain positive about from a long-term perspective.
Gang said the broader wellness theme includes hospitals, diagnostics, healthcare services and pharmaceuticals.
“The wellness theme, including hospitals, diagnostics, healthcare and pharmaceuticals, is interesting,” he said.
According to him, changing healthcare needs and rising demand for quality healthcare services make this an important theme to track.
6) Consumption theme: FMCG, discretionary and new-age businesses
Consumption was another theme highlighted by experts.
Gang said consumption is a broad theme covering:
- FMCG
- Consumer staples
- Consumer discretionary
- New-age consumption such as e-commerce
He said some segments have become reasonably valued, while some newer consumption areas still offer opportunities.
“Given India’s economic growth and increasing purchasing power, this theme has potential,” Gang said.
He also highlighted premiumisation as a sub-theme within consumption.
7) Financial services theme: Beyond traditional banking
Experts also discussed financial services as a broader theme beyond banks.
According to Gang, the theme includes:
- Wealth management companies
- Index providers
- Distributors
- NBFCs
- Asset management companies
- Insurance companies
“The overall theme is interesting from a long-term perspective,” he said.
Who should invest in thematic funds?
Experts said thematic funds are not suitable for every investor. Mahajan categorised investors into three groups—conservative, hybrid and aggressive.
For conservative investors, thematic funds may not be suitable.
“For conservative investors, this category is not meant for them. They should stay away from thematic funds because drawdowns can be significant,” Mahajan said.
He warned that even if a portfolio has a large allocation to fixed income or gold, adding thematic funds without understanding the risk can increase volatility.
Explaining the risk involved, Mahajan said thematic funds can see much sharper corrections compared with broader equity funds. “Sometimes you invest Rs 100 and its value can fall to Rs 50 because the cycle turns against you,” he said, highlighting the importance of having the risk appetite to handle such drawdowns.
Hybrid investors can consider limited exposure.
“Hybrid investors can consider around 5 per cent allocation from their overall portfolio,” Mahajan said.
Aggressive investors with higher risk appetite may consider a larger allocation.
“Aggressive investors can allocate around 10-15 per cent of their equity portfolio to thematic funds. But one thematic fund should not account for more than 5 per cent of the overall portfolio,” he said.
“Do not enter thematic funds at their peak”
Experts repeatedly warned investors against entering themes after they become popular.
Mahajan said investors need to study the theme deeply before investing.
“Do not come into a theme at its peak. If you enter at peak valuations, drawdowns can be very high,” he said.
He added that investors need to understand whether a theme still has a long runway or whether most future growth is already priced in.
Mahajan said market cycles have become shorter and more dynamic compared with the past, making it important for investors to continuously track whether a theme still has growth potential. “Earlier, cycles used to be longer. Today, markets are much more dynamic — one sector performs today, and another can take over tomorrow,” he said.
Avoid overexposure to the same themes
Experts also highlighted the risk of portfolio overlap.
Mahajan said investors should remember that many diversified funds such as flexi-cap, large-cap and large & mid-cap funds may already have exposure to emerging themes.
Adding a thematic fund without checking existing holdings can lead to excessive exposure to the same sectors and companies.
What investors need to do?
Experts advised investors not to blindly follow what others are buying.
Mahajan said investors should focus on long-term wealth creation rather than chasing short-term returns.
“The important thing is not whether I target 15 per cent, 18 per cent or 20 per cent returns. The important thing is how long I stay invested and how I manage the journey,” he said.
He added that investors should question strong performance as well.
“Always question outperformance also. Ask whether it is sustainable. Can a business growing earnings at 15-18 per cent continue growing at 50 per cent?” Mahajan said.
Experts believe thematic mutual funds can add value to an investor’s portfolio, but they should be treated as a tactical allocation rather than a core investment.
Investors should focus on understanding the theme, valuations, portfolio composition and exit strategy instead of investing simply because a particular fund has delivered high returns in the past.
