What is Thematic investing? All you need to know about
If you pay attention to your daily routine, you’ll see that many firms’ products/services have a link with your life and the lives of millions of families across the nation and the globe. But it begs the question: are you taking advantage of such opportunities?
During talks, we frequently hear statements like, “The Pradhan Mantri Jan Dhan Yojana is a terrific program introduced by the government to make banking inclusive” but what are we doing to turn this into wealth?
Today’s world is constantly evolving, and there has been a massive paradigm shift due to disruptive ideas, unparalleled technical advancements, and changing consumer tastes.
Thematic investing is a type of investment strategy that identifies more significant macro-level trends as well as the firms and sectors that will benefit from those trends materializing.
A good investor seeks to predict these trends and buy in the underlying assets and businesses ahead of time. The goal of thematic investing is to profit from these transitions by selecting and investing in firms most likely to gain from them.
It entails matching our values and ideals to our assets. Thematic investing is gaining popularity to identify future contributors of return from stock investments allowing investors to outpace traditional broad indexes, which reflect the market’s overall movement.
The good news for many investors is that thematic investing offers the potential to assist in positioning holdings for long-term growth.
What is the Process of Thematic Investing?
A conventional thematic investing strategy considers the following variables when selecting stocks, ETFs, bonds, mutual funds, and other assets.
You can engage in themed mutual funds or exchange-traded funds (ETFs), which provide you with expert investment analysis and management benefits.
While investing in ETFs or mutual funds, you can benefit from experienced financial planners and research groups who strive to build high-performing products.
Investing in a thematic fund enables you to diversify your risk by investing in a single theme.
Manually creating a thematic portfolio involves the following steps
- Finding Themes and Categories – As a first step, you should screen out the themes you are interested in.
- Research and Choice – Examine various concepts and sectors, compare them to other asset classes, and decide.
- Managing Weights – Consideration is for the market-cap-weighted or risk-weighted allocation in the portfolio. You can, however, shuffle and personalize your portfolio based on your risk appetite.
- Rebalance – It is customary to restructure your portfolio regularly to get optimal returns and risk balance. As the performance of the constituents diverges, you should change your portfolio to bring the weights back into line with the original strategy.
Sector Investing vs Thematic Investing
Since sector investment and thematic investing are similar, it’s easier to get these two methods mixed up. Targeting companies in specific parts of the economy, like information technology or energy, is known as sector investing.
On the other hand, a theme investing strategy can span many industries to correspond with a potential market or specific goal.
Let us have a view of how these techniques stack up in a similar industry
1. Sectoral investing
Investing in companies that are parts of a specific industry, such as semiconductor manufacturers, healthcare, or social media companies.
2. Thematic investing
Investing in one or more of the following industries simultaneously, as long as they are related to a disruptive communications theme: semiconductor manufacturers, mobile phone tower operators, and social media firms.
Benefits of Thematic Investing
- Thematic investing allows you to profit from future trends. It assists you in investing in ‘Future Businesses’ due to its forward-looking character.
- A themed investment strategy focuses on a single theme, idea, event, or government policy and invests in linked industries.
- To understand future trends, thematic investing necessitates a thorough awareness of the impact of all patterns on various areas and sectors and a forward-thinking cognitive process.
- Thematic investing can operate as a portfolio hedge since it focuses on global trends and disruptive innovations.
- Thematic investing gives the possibility for investors to earn more alpha.
Limitations of Thematic Investing
- Thematic funds carry a high level of risk because of their basis on a single idea or subject that may or may not generate high returns, particularly during market cycles.
- If you invest in themed mutual funds, you should expect a higher expense ratio than conventional mutual funds.
Emerging opportunities and structural transformations that can provide superior returns or intangible gratification to the investor are the focus of thematic investing.
To create optimal returns and maintain a balanced risk profile, you should regularly monitor and review your portfolio.