What are Thematic Funds?

Many newcomers in the markets often dip their toes into the markets by investing in mutual funds. However, a major hurdle occurs when it comes to picking the right mutual fund. Numerous options vary by asset class, risk, and market capitalisation. Mutual funds, such as thematic funds, can also be viable for investors who want to take a bet on a particular trend or theme. The blog explores what thematic funds are and the key advantages and risks of investing in them.

Thematic Mutual Fund: Meaning

A thematic fund is a type of mutual fund that invests across various industries or market sectors. These funds aim to generate returns for investors by capitalising on specific themes.

A thematic mutual fund’s investment strategy depends upon various factors such as the economic conditions, industry outlook, and emerging market trends. A thematic fund has a pre-determined theme and invests in sectors and industries that align with the theme. Fund managers of thematic mutual funds closely track changes in consumer behaviour, regulatory environment, or technological developments to align the fund’s strategy and capitalise on future growth.

How Do Thematic Mutual Funds Work?

Thematic mutual funds have a top-down approach to investing. In other words, the mutual fund first identifies a particular theme or trend with the potential to generate returns in the future. Following this, fund managers identify industries and sectors that are likely to benefit from future developments or changes. 

A thematic fund invests a minimum of 80% in these market sectors or industries that align with the theme. Thematic mutual funds are primarily equity funds, and their portfolio includes companies of various market capitalisations.

Let’s look at some examples of thematic funds:

Manufacturing & Infrastructure: These funds invest across sectors such as construction, utilities, metals, and chemicals.

Services: Thematic mutual funds that invest in companies that mainly generate revenue through services.

ESG: Thematic funds that aim to invest in companies that focus on and follow the environmental, societal, and governance (ESG) norms.

Thematic Fund vs. Sectoral Funds

Although investors may understand thematic funds, a key challenge arises in differentiating between them and sectoral funds.

Unlike a thematic fund, a sectoral fund focuses on a particular sector such as banking, metals, or IT. These funds invest in companies of a single industry and aim to generate returns from the growth in that particular sector.

Difference between Thematic Funds and Sectoral Funds

Key Features of Thematic Funds

Here are some of the salient features of thematic funds:

• Thematic funds target a particular theme or emerging trend.
• The primary objective of the funds is to invest in sectors and industries that will likely benefit from the specific theme.
• Although these funds invest in a particular theme, they offer enhanced diversification as they invest in various market sectors and industries. The funds also invest in companies of varying market capitalisations.
• A thematic mutual fund is an actively managed fund. Fund managers closely track developments and changes in various factors to make investment decisions that align with the fund’s theme.

Advantages of Thematic Funds

A thematic fund offers several key advantages, such as:

• Broader market exposure by investing across different industries and market sectors.
• The diversification of a thematic mutual fund also helps spread risk and prevent overconcentration.
• By investing early in a thematic fund, investors can generate significant returns.

Risks Associated with Thematic Funds

Here are some of the challenges and risks associated with investing in thematic mutual funds:

• Thematic funds are susceptible to market conditions. Unfavourable market conditions can result in lacklustre performance or even losses.
• Geopolitical conditions, interest rates, and government policies are also key risks of thematic mutual funds.
• Major global or domestic events may have an adverse impact on the overall market and a particular theme.

Who Should Invest in Thematic Mutual Funds

Thematic mutual funds may be ideal for investors who:

• Have a long-term investment horizon and want to benefit from the long-term growth of a particular theme or trend.
• Thematic mutual funds carry moderate to high risk, making them suitable for investors with a larger risk appetite.
• A thematic mutual fund is more suitable for investors who are well-informed about the market and the particular theme that they are investing in.

Things to Consider Before Investing in a Thematic Mutual Fund

Here are certain things that one should consider before investing in a thematic mutual fund:

• Evaluate your investment goals, including your investment horizons and the objectives you aim to achieve through your investment.
• Know your risk profile and invest accordingly. Thematic funds carry higher risk and are suitable for investors who can bear the risk.
• Study and research the theme that you’re investing in before making an investment decision. Carry out thorough research to understand the growth opportunities and risks of the particular theme or sector.
• Analyse and compare the thematic mutual funds. Study the fund manager’s experience and past performance along with metrics such as the expense ratio and other fees.

Top Thematic Mutual Funds in India

Here are some of the best-performing Thematic Mutual Funds in India in 2025

(Data as of July 28, 2025)

Taxation of Thematic Mutual Funds

Thematic mutual funds are taxed similarly to other equity mutual funds. Depending on the holding period, the gains on thematic mutual funds are subject to short- or long-term capital gains tax.

Conclusion

As an investor, getting in early on an emerging theme can help you generate above-average returns. Thematic funds are a suitable way for investors to take a bet on a particular theme and allow investors to benefit from diversification. However, an investor should conduct thorough research and know the risks associated with these funds before investing.