We live in an evolutionary world where everything changes with time. The stock markets in India has evolved from equity to derivatives to mutual funds and ETFs. Thematic investing is the next step of this evolution. It provides even laymen an opportunity to invest their hard-earned money in the most effective way.
Thematic Investing is a more efficient alternative to mutual fund investing.
Ideology of Thematic Investing: We live our lives based on our understanding of it. Our geography, education, profession and habits determine how we go about ourselves. Even when it comes to money, we generally like to invest in something that resonates with our ideas and understanding. Thematic Investing is a platform that helps you do just that in a completely hassle-free way. It is built to empower you to invest professionally based on your individual thinking process instead of having to your own research or build your own portfolio from scratch.
For example, if you think that renewable energy is the way of the future and foresee that it will replace fossil fuels someday, you can invest in a theme that is designed specifically with that view. So, you can save your valuable time & energy to do other things instead of being burdened with cumbersome and high level research work that is required to manually build the portfolio yourself. In effect, you can focus on your ideas and let us focus on the stocks.
Decision-making framework in investing is based on ideas, not facts alone.
How Thematic Investing works:
• – We have over 100 different kinds of themes which are built based on innovative concepts and ideas which are shaping the world around us. You can choose any theme which suits your conviction.
• – Each theme put into separate categories so you can sort them based on your preferences. Categories allow you to sift through the wide variety in the shortest amount of time. For example, if you’re looking to invest in themes based on government policies, you can instantly filter them with one click.
• – Read about the themes you like, compare it to others, benchmark it against other asset classes like equity, gold and fixed income to know how it has done in the past and proceed to configure it according to your preferences.
• – By default, we recommend that clients buy an equi-weighted version of the theme so that risk & returns are properly balanced. However, based on your risk appetite, you can either choose an aggressive version or the safe version. The weights are fully customizable. You can take full charge of the allocation to manage risk and return in a way that makes you most comfortable.
• – Since the performance of companies and markets fluctuate from time to time based on underlying conditions, it is always wise to constantly keep your investment updated. After you invest in a theme, the performance of the stocks within the theme are being tracked on an ongoing basis. When it makes sense to rebalance (Sell some existing stocks and/or buy others), you will be notified so that you can make the necessary changes through the platform with just a few clicks. The idea is to make sure that the portfolio of stocks always embodies the underlying idea behind it. Although we cannot put a finger on an accurate time-frame, typically it should happen per quarter. Since the stock markets are dynamic, each rebalancing interval can be different.
What is a theme – A theme is a ready-made idea based portfolio of stocks. It is designed keeping in mind the underlying idea or investment rationale behind it. The stocks within a theme are chosen after carefully curating and shortlisting them in a series of steps to identify the most suitable ones. The stocks within a theme are subject to change from time to time. Investors will receive notifications to update themes on an ongoing basis.
All great investments, begin with an idea.
How thematic investing is different from mutual funds:
• – Mutual funds are market weighted. What this means is that they put more money in the larger companies and not necessarily in the ones which have higher potential. It prevents them from capitalizing on large opportunities as they are bound to invest smaller amounts in them. In comparison, themes are equi-weighted which means that you get an equivalent exposure to each stock in the portfolio regardless of the market capitalization of each company. This approach gives investors the opportunity to make larger profits.
• – Most mutual funds are over-diversified which results in a mediocre return. A typical mutual fund has investments in over 50 stocks. This is not the upper limit but an average. If you want see the holdings of individual funds yourself, click here. In comparison, themes have anywhere between 2 to 20 stocks which are all based on a specific sector, trend or idea. This gives you a concentrated exposure which is required to make higher returns in the stock markets.
• – Mutual funds are structured in a way that they have a very high beta correlation to the benchmark indices (NSE, BSE). This means that their performance is highly dependent on the performance of these indices as they track the broader market very closely. On the contrary, themes are built to reflect ideas, sectors and trends hence they do not necessarily track the performance of Nifty or Sensex. Thematic investing empowers you to go beyond the traditional investment methodologies and make outsized returns if your ideas come to fruition.
• – Investing in a mutual fund can be confusing due to the sheer number of schemes available in the market. In 2016, SEBI asked MFs to reduce the number of schemes. Most of the MF portfolios are similar to each other which adds to the dilemma to both, the advisor and investor. In contrast, the decision-making process via thematic investing is very interesting, clearly differentiated and fast.
• – Thematic Investing allows you to fully customize your equity portfolio. On our platform, you can choose from 3 different variants (Equi-weight, Max return & Low risk) for each theme. You can also remove or change the weights as per your preferences. Mutual fund investing is rigid & the investor cannot make any changes to the portfolio whatsoever.
• – When you invest in stock markets through Thematic Investing, you can learn a lot about the world around you in the process. It is interactive where you get to read curated information and facts our platform. You can develop useful knowledge along the way. We also deliver useful content on Brainstorm. Whereas, if you invest in a mutual fund, the entire process is opaque so you feel disconnected from your investments.
• – Typically, a mutual fund charges fees of up to 2.5% of your total investment per year. Investing in or rebalancing a theme will cost you a flat fee of ₹100/- only + brokerage charges. (If you consider an investment of ₹100,000, you will end up paying ₹2,500 per year to a mutual fund whereas the charges to invest in themes could be as little as ₹100)
• – Mutual funds have been around for ages. Thematic Investing is a rising trend and has the potential to be the first preference for investing in the stock markets. You can read this Mckinsey report on thematic investing report by for more information.
Tejas is the Co-Founder & CEO @ www.fyers.in, the youngest team to get NSE’s broker license. FYERS was started as a mission to enhance the terrain for traders and investors in India. He previously worked at Zerodha, Futures First & has been a professional trader for several years.