Thematic investing has gained a lot of interest recently amid the volatility in the stock market. Learn the basics of thematic investments from the industry expert himself.
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00:00 (upbeat music)
00:02 - Amid the volatility in the stock market,
00:10 I found favor with investors keen to explore
00:14 these emerging futuristic trends.
00:16 I'm Sudeep Sanyal, Assistant Editor Outlook Money,
00:20 your host for this session.
00:22 And I'm delighted to welcome Mr. Umesh Kumar Dalia,
00:26 Head ETF Sales, Mera Asset Investment Managers,
00:29 India Private Limited, as part of Outlook Money's
00:32 Investment Made Easy webinar series.
00:35 He will be throwing some light on the strategy
00:37 one should adopt for investing in thematic investments.
00:41 Welcome Mr. Dalia.
00:43 So to start with, could you please tell for our viewers
00:47 what exactly is thematic investing?
00:49 - Yeah, hi Sudeep, thank you for having me on the call.
00:54 So yeah, you rightly said the themes are something
00:58 which are now becoming an important part
01:01 of every investor's portfolio,
01:02 especially the evolved investors.
01:04 They have started moving towards themes,
01:07 keeping their advantages in mind.
01:10 But before talking about these themes,
01:12 let's understand what is theme actually,
01:14 what do we mean by thematic investing?
01:18 So thematic investing is basically a type
01:20 of investment strategy wherein you actually identify
01:24 broad-based macro-level trends in the economy itself,
01:29 as well as the business that actually would be benefited
01:33 from such trends.
01:34 It basically enables investors to get returns
01:38 through potential opportunities created by economical,
01:42 social, or technological changes.
01:45 We have seen a lot of changes that are happening
01:46 in different businesses, right?
01:48 So these, basically it is a top-down approach
01:52 to investments that uses macroeconomic trends
01:56 and identifies problems, basically,
02:00 not problems, I must say,
02:01 identifies how to get profit out of these investment avenues.
02:06 Our thematic funds basically represents a particular theme,
02:11 and that theme, and then keeping that theme in mind,
02:15 they invest into across assets of businesses
02:18 that represent that particular theme.
02:21 To give an example, if you choose manufacturing as a theme
02:26 and you want to invest into manufacturing theme,
02:28 then that manufacturing fund theme will invest
02:31 into companies which are engaged in manufacturing sectors
02:35 like auto, pharma, chemicals, steels, and et cetera.
02:39 So basically, themes is something where you are capturing
02:42 the entire ecosystem or that particular theme
02:44 which you captured, starting from scratch till the end.
02:48 So all the businesses which are part of that theme
02:52 will become a part of investors' portfolio
02:55 if investors chooses that theme,
02:57 that particular theme for their portfolio.
02:59 - All right, so you said a very nice word,
03:02 which is ecosystem.
03:03 So we can understand, just for our viewers,
03:06 suppose if you invest in, suppose, as I said, EV,
03:10 so that's a new trend now.
03:12 So that would also include everything
03:14 from the automobile manufacturers
03:16 to even the lithium battery manufacturers,
03:19 to other, that would be all part of the theme, right?
03:22 - Yeah, yeah, absolutely right.
03:24 Like if, as you said, EV, so electric vehicle
03:26 is something which is very much talked about in India
03:29 and across the globe also.
03:30 When we talk about themes based on EV,
03:34 obviously the theme should be capturing
03:36 the entire ecosystem, starting from mining
03:38 till the car parked in a showroom.
03:40 So whatever is required during that particular process,
03:44 everything, every company should be included in that theme.
03:47 That's where the beauty of a theme,
03:50 the thematic in investing actually gives you exposure
03:53 into all the related companies and the businesses.
03:57 - That would have definitely cleared a lot of doubts
04:01 for our viewers.
04:02 And now, when we talk of India and the global scenario,
04:05 how have thematic fronts grown?
04:07 I mean, it's a rather new concept, as I can understand.
04:12 - Yeah, actually-
04:12 - What does that mean?
04:13 - Yeah, actually it is, it is.
04:15 But lately, if you see in last few years,
04:18 couple of years, a lot of investors, as I said,
04:21 have already started moving towards themes
04:26 or they have started including themes
04:28 into their portfolio, right?
04:29 And the listing has been happening around 2,486 listings.
04:33 So, because one fund get listed in multiple exchanges also.
04:38 This is a data which says that it's not a phenomenon
04:42 which is restricted to one country.
04:44 It is a global phenomenon where globally investors
04:46 are looking for such avenues.
04:49 Now, let's talk about from India perspective.
04:52 If I got some data from ASMF,
04:54 it says that in last year, as of July, 2022,
04:58 there have been 11 new products
05:02 already being launched in India.
05:04 And the current AUM or current inflows in last one year
05:08 is around close to 2,767 crore.
05:11 So, as I said, it is not restricted to US
05:14 or any other country.
05:15 In India also, we have started seeing investors
05:17 are inclining towards these things
05:19 because these themes have some merits
05:21 which are not already available in client's portfolio.
05:24 - Many people seem to confuse between thematic funds
05:31 and sectoral funds.
05:32 I mean, this is a very, there is a difference,
05:35 but for many viewers, there seems to be
05:38 that thin line of margin that they do not seem
05:40 to kind of gauge.
05:42 So, if you can show some light on them
05:44 as to how they are different, that would surely help them.
05:48 - Yeah, I think you're right
05:50 because this is a new phenomenon lately,
05:53 few couple of years only it has come into picture.
05:58 So, when we talk about the difference
06:00 between a sector fund or a thematic fund,
06:02 the major factor that actually differentiate thematic fund
06:06 from a market cap or a sector fund
06:08 is basically their investment strategy
06:11 because a thematic fund intends to capitalize and trend,
06:15 a trend or, and would invest around that broad theme
06:19 that cut across different sectors.
06:21 So, when we talk about theme,
06:22 it can be of multiple sectors also.
06:26 An example of thematic fund is like,
06:30 if you talk about say financial services industry.
06:33 So, the financial services industry,
06:35 when we take it as a theme,
06:37 it includes not only banks,
06:39 it includes banks, insurance companies,
06:41 asset management companies, stock exchanges.
06:45 So, this is a multi, like a theme
06:48 where you can have multiple kind of,
06:50 multiple businesses part of it.
06:52 Where if you talk about a banking fund,
06:54 which is a sector fund,
06:55 then there you will find say private banks or PSU banks.
06:58 I'm just quoting example, keeping India in context.
07:01 Like if you go globally, like electric vehicle,
07:04 it's a theme.
07:04 It's not restricted to only battery as a sector
07:08 or say any specific sector.
07:11 It's like it includes everything.
07:13 Similarly with AI also, similarly with robotics also.
07:16 So, theme is basically an approach
07:20 where you can cut across different sectors also.
07:23 So, it's like a way beyond
07:25 than a particular sector investment.
07:27 - Thank you for that clarification.
07:33 I'm sure a lot of our viewers
07:35 would have now understood the difference between the two.
07:38 Now, when we talk of products,
07:39 now there are also like active products
07:41 and passive products that we talk of.
07:44 So, is it true that passive products
07:47 may be a better way to take exposure in various themes?
07:51 - See, by nature, if we go for talk about passive funds,
07:57 these funds are actually cost-effective.
08:02 Not only themes, it's like you go for a broad-based index
08:05 or any index.
08:06 So, as a nature of passive fund,
08:07 generally we find that these are products
08:09 which are cost-effective as compared
08:11 to the existing actively managed fund.
08:15 But yeah, on a theme also,
08:17 passively managed thematic funds
08:19 can be a lower cost way to participate
08:21 in some promising themes, like, as I said,
08:24 manufacturing, consumption, ESG, et cetera,
08:27 which have structural tailwinds in the long run.
08:31 And many investors actually concerned
08:33 about the stock selection risk in the volatile market,
08:37 like we have seen in India lately
08:40 and globally also we're seeing.
08:42 In such volatile market where investors are confused
08:45 which stock to buy, which not to buy,
08:47 I think indexing is a very good idea.
08:49 Their indexing would solve that problem
08:52 by simply investing in stocks
08:53 that are actually already part of that index.
08:56 So, this is actually the index has a predefined structure
09:01 on this, so with the stocks are being selected.
09:04 So, investor need not to put his mind there
09:06 and obviously it reduces the fund manager risk also.
09:09 So, on two parts, cost and also to remove the confusion
09:13 with stock to buy, which not to buy,
09:15 passive can be a very good option
09:17 where investor can choose,
09:18 especially for thematic investment.
09:21 - Now, there could be various themes also, as you've said.
09:24 I mean, this entails the ecosystem.
09:27 So, if we can say though,
09:29 how are the various themes different from each other?
09:33 I mean, in terms of investment
09:34 and what is the return expectation
09:37 if you could point that out?
09:40 - Yeah, so I would like to add a risk also here
09:44 because every product has a different risk
09:47 and return profile or characteristics if I talk about.
09:51 So, like to give an example,
09:53 like a thematic fund based on ESG
09:56 might offer you more stable returns with lesser volatility,
10:01 whereas a theme like say, if you go for a robotic theme,
10:04 which is expected to scale up in future in multi-fold,
10:08 but it might be able to generate higher return also,
10:11 but every fund has a different risk profile.
10:14 Every investor should choose those funds
10:17 keeping the risk profiling of his or her own in mind,
10:21 like as I said, if you go for a more volatile
10:24 or more futuristic theme,
10:26 that you might need to stay for longer period for that theme,
10:31 maybe for five year or six year or so.
10:33 So, everything is a different risk return profile
10:36 and investors should choose wisely
10:38 while investing into any of the themes.
10:40 - So, now you have told about the risk profile,
10:45 I'm sure viewers would have had some kind of,
10:48 I mean, idea about how to go about this.
10:51 Now, my next question will be, now we talk of investing.
10:55 So, suppose if someone were to create a portfolio
10:58 using thematic products, so how should one go about it
11:01 and what should be the ideal allocation
11:03 if you could give a rough idea?
11:05 - Yeah, yeah, yeah.
11:07 So, actually this is a very important question
11:09 when we talk about allocation
11:11 because you cannot put all the eggs into one basket
11:14 and also you cannot go take so aggressive call
11:18 that you put your money into some theme.
11:23 So, it doesn't matter how bullish you are on that theme,
11:28 but you should have a wise call
11:31 while investing into anything.
11:33 So, I must say based on investment objective
11:36 and conviction about the particular theme,
11:38 investors can take a short-term tactical call also
11:41 and should make long-term strategic allocations also.
11:45 They can, which by doing a long-term call,
11:49 taking a long-term call,
11:50 they can patiently write out a growth cycle
11:53 of that particular theme,
11:54 which is a more futuristic theme
11:56 as I talked about earlier.
11:58 Since these themes have a higher concentration risk also,
12:02 so compared to broad-based indices or broad-based fund,
12:07 investors should consider,
12:08 can consider from 10 to 15% kind of allocation
12:11 to these thematic products.
12:13 If an investor follows a core and satellite
12:15 investment strategy,
12:18 then I must say that thematic funds
12:19 can be the satellite,
12:21 a part of the satellite portfolio for the investor.
12:24 So, from an investment perspective,
12:26 core can be your broad-based
12:27 and these themes can become your satellite portfolio part.
12:32 And that's how an investor can define these themes
12:36 into his or her portfolio.
12:38 And obviously, keep the risk profile of particular investor,
12:43 him or her in mind while choosing these themes.
12:47 - Okay, so as you said,
12:49 the allocation should be based totally on their risk profile
12:53 as we normally do with other zones.
12:56 So viewers, I hope you found this very enlightening.
13:01 We will be back again with another episode
13:04 of Outlook Money's Investment Made Easy.
13:08 Thank you.
13:09 - Thank you so much.
13:11 - Mutual fund investments are subject to market risks.
13:14 Read all scheme related documents carefully.