Thematic Investing

Why Thematic Investing Is the Future!

Is thematic Investing the future

Unlike mutual funds which are mainstream, the concept of Thematic Investing is new in India. In the evolution of capital markets, there has been progress from equity and derivatives to mutual funds. Thematic Investing is the next stage of this evolution considering the millennial generation’s consumer habits and busy lifestyles. There is an inclination from young investors to incorporate thematic investing to build a healthy portfolio as an alternative to the mainstream method of investing through mutual funds.

Thematic Investing is about depth, whereas Mutual funds are about breadth.

The concept behind thematic investing:

The primary focus of thematic investing is to invest in ideas, events, circumstances or sectors which can evolve relatively independently of the economic cycle. Unlike mutual funds which base their equity allocation primarily on the equity benchmark indices (Nifty & Sensex), thematic investing is about identifying distinct growth opportunities which are not directly dependent on the general outcome of the economy. As an investor, if you use this strategy to construct a portfolio by buying the most suited themes you are likely to outperform the indices by a big margin if your convictions turn out to be right. It is smarter to diversify in several specialized themes rather than several diversified equity mutual funds because themes offer a powerful diversification mix and the investment decision is taken on the basis of purely individual expectations from each theme. A diverse mix of themes gives you a broader exposure which goes beyond beating the benchmark equity returns (Nifty or Sensex).

How themes are built:
1. Defining the stock universe.
2. Identifying companies and sub-sectors within the stock universe.
3. Shortlist their scope and business activities.
4. Proprietary quantitative research.
5. Thorough fundamental research.
6. Proprietary Performance analysis & projections.
7. Right mix of stocks to ensure the optimal exposure to the theme.

Hindsight of Historical Performance:

Needless to say, there have been some sectors and stocks which have outperformed the benchmark indices and the best mutual fund by a huge margin because their businesses flourished. These sectors and companies have largely contributed to the returns achieved by Nifty, Sensex and other benchmarks. Let’s take a look the 5 years return profile of some indices and stocks to understand why it is important to be properly invested:


Index 5 year Returns as on 28.01.17

As you can see above, if you had invested in the sectors which did well, your returns would be high. However, if you had invested in sectors which did badly, your returns would be very mediocre or negative in comparison depending on your entry price. All this is assuming that you are investing in all the stocks within each index. Let’s explore the performance of individual stocks within the indices mentioned above. It is very important to be optimally diversified as overstepping can severely affect your returns.

Hindustan Zinc80%NIFTY METAL3%

Stock 5 year returns of Stock Relevant Index which contains the stock 5 year returns of Index
Eicher Motors 1227% NIFTY AUTO 141%
Yes Bank 305% NIFTY BANK 100%
Aurobindo Pharma 1189% NIFTY PHARMA 115%
Britannia 553% NIFTY FMCG 113%
Maruti Suzuki 377% NIFTY 71%
HCL Tech 271% NIFTY IT 61%
Bank of Baroda 45% NIFTY PSU BANK 4%
Delta Corp 68% NIFTY REALTY -22%

Usually, diversification comes at the expense of returns.

Although diversification is important to contain risk, beyond a point, it adversely impacts returns. Hence, the 100+ themes in thematic investing are constructed keeping in mind an optimal yet powerful diversification. This is contrary to mutual funds’ philosophy of over-diversification. Since the future cannot be accurately foretold, the mix of stocks are arrived at after thorough analysis of each stock’s future potential. The constituents of themes are mostly pure-play rather than a diversified portfolio. Past performance is not a guarantee of future results however in our dynamic world, the past does shape the future in a reflexive way. Companies which have a good track record are more likely to outperform ones that don’t.

Flexible Investing:

With thematic investing you have privileges that are not available to investors otherwise. It can be fully passive or active depending on how you use the platform. In either case, it is designed to meet your most important investment needs. It takes care of 9 out of 10 steps required for successful investing. You will need to take that final step and make smart investment decisions. It can be used effectively by beginners, active traders, long-term investors and portfolio managers. Using the platform everyone can build unique portfolios based on their needs rather than having to invest in a mutual fund which does not give you any customization or control.

Engaging Experience:

When you invest in a mutual fund, you don’t really learn anything whereas investing in thematic investing, you get to read, learn and track the performance of uniquely different themes. This gives you a holistic understanding about the business environment, economy, trending ideas and stellar companies. It makes you a more aware individual and equips you to deal with the future more effectively. You will develop your own unique perspective about investing as you progress in this path. This educational activity can pave the path for being financially wise and successful.

Learn more about the basics of Thematic Investing here.

Do feel free to ask queries and share your views.

Tejas Khoday

Tejas Khoday

Tejas is the Co-Founder & CEO at FYERS, the youngest team to get NSE’s broker license. He has a specialization in finance and has over 10 years of work experience spanning across proprietary trading, risk management, and broking. Tejas & his team started FYERS, a technology-focused brokerage as a mission to transform the trading/investment landscape in India.


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