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What is thematic investing?
Oct 28, 2022
3 min | Views 1768
Equity investing is all about growing your money over time. It focuses on seeking out growth opportunities, especially long-term ones. Stocks, which for some or the other reason have growth potential in the years to come. How do we identify these promising stocks? What factors should we study? Etc etc…. equity investing is fraught with such questions!
Investing mavens have over the years delved into several strategies to find the answers to these questions.
There is one emerging investing strategy which has now begun to gain traction in Indian capital markets. It seeks to lay down a foundation for identifying promising future stocks!
Meet, ‘Thematic Investing’
As the name suggests, this is equity investing which focuses on identifying investable themes and trends and then the stocks which can benefit from these trends.
Let’s define ‘thematic’
“Looking at things from the outside!”
Simply put, this is the thematic meaning and what thematic investing seeks to do.
Traditional investing focuses on performance and financial analysis of stocks or indices against benchmarks.
Thematic investing on the other hand is macro-driven investing strategy. It is ‘vision-based’ - focusing on trends and themes rather than specific industries or sectors.
Let's break this down:
-
Identify palpable trends
This involves identifying long-term or disruptive trends that are going to shape the future. These trends can be across arenas from economic to demographic, social to political and beyond.
For example – One can consider ‘Infrastructural development’ as an emerging theme, or ‘Sustainability’ and ‘Clean Energy’ as an upcoming trend or even ‘Robotics’. -
In-depth research on trends and themes
Studying the specifics of the trend and determining whether they are truly long term and structural, as opposed to being short term and cyclical is key. Long-term structural trends are ones that can truly create investable opportunities.
For example – Infrastructural development for example is not a one-time exercise and can go on for decades in a populous country like India. -
Identify likely beneficiaries of the trend
Here we look for sector and industries and individual companies/stocks that can be direct or indirect beneficiaries of the identified theme. This can be because they have customers who align to the theme, or their products/services cater to the theme. For example - Infrastructure theme can cover stocks across sectors like cement, steel, paint, contracting etc.
Clean energy theme can cover several companies that are investing in some or the form of renewable energy from power companies to solar companies, automotive and battery companies and the like. -
Narrow down the choices
In order to ultimately build a thematic portfolio, we analyse the fundamentals and individual strengths of each of the identified companies. To ultimately choose the best combination of both alignment to the theme as well as strong stock fundamentals.
Why opt for thematic investing?
Apart from the fact that it is fast gaining popularity amongst investor circles and departs from traditional rule-based investing, there are several benefits you can look for when you opt for thematic investing.
These include:
A ‘forward looking’ strategy
Thematic investing focuses on the future rather than past. Equipping your portfolio to be ‘future-ready’.
Can generate considerable alpha
Thematic investing looks for investment ‘hot spots. These have the potential to witness considerable growth in the years to come, earning you high returns beating the general market.
Diversification while avoiding over diversification
Will generally cover stocks from across sectors that align to the theme. On the other hand, while sticking to the theme, it prevents overloading your portfolio with stocks that can dilute eventual returns.
Make your investments match you
With thematic investing you can align your own personal interests, values and vision to that of your investments by choosing the theme accordingly.
How can you bring thematic investing to your portfolio?
Identifying future trends and envisioning several macro-economic conditions may seem like a daunting task. It is for this reason that several AMCs offer ‘thematic mutual funds.
What is a thematic mutual fund?
A thematic mutual fund is an equity mutual fund that invests in stocks that are aligned to a specific theme. They build a broad-based portfolio based on thematic investing principles.
It’s time to seek out those long-term disruptive trends that can make you a successful investor with a winning portfolio. Opt for a reputed AMC with experienced fund managers to cash in on this ‘trending’ thematic investing opportunity.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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