Thematic fund

Some investors find it easier to back an idea than a sector. They believe in infrastructure, not specifically in cement or steel. A thematic fund lets them buy the idea.

SEBI's categorisation defines it as an open-ended equity scheme investing in line with an investment theme. The workbook's example: an infrastructure thematic fund might hold companies in infrastructure, construction, cement, steel, telecom and power. Other examples it gives are MNC funds and PSU funds.

That places the thematic fund between two neighbours. A diversified fund can invest across the whole market. A sector fund invests only within one sector, such as banking or pharma. A thematic fund cuts across several sectors, but only those that fit the theme — so it is more concentrated than a diversified fund and less concentrated than a sector fund.

ESG investing sits here too: SEBI created a separate ESG sub-category under the thematic category of equity schemes.

The category rules (Chapter 2, SEBI's categorisation of equity schemes):

Where it sits on risk (Chapter 12, Illustration 12.1.5):

Diversified funds → Focused funds → Thematic funds → Sector funds

Risk and potential return rise from left to right, because concentration rises. The workbook adds a caution: concentration is one risk among several, and a large-cap sector fund and a diversified small-cap fund are exposed to different risks that cannot simply be ranked.

ESG strategies. An ESG scheme under the thematic category can follow exclusion, integration, best-in-class and positive screening, impact investing, sustainable objectives, or transition or transition-related investments.

Benchmarking. Sectoral and thematic funds use sectoral or thematic indices, such as the Nifty Infrastructure Index or Nifty Energy Index. Under SEBI's two-tier structure, thematic and sectoral schemes carry a single benchmark, because the scheme's characteristics are already shaped by its theme.

Illustrative. The scheme, corpus and overlap figures are hypothetical; the limits are the workbook's.

A fund house runs an infrastructure thematic fund with a corpus of Rs 1,200 crore.

The 80 per cent test.

Minimum in equity of the theme = 80% × 1,200 = Rs 960 crore

Its holdings span cement, steel, construction, power and telecom companies — five sectors, one theme. Had it held only power companies, it would look like a sector fund.

The overlap test. The fund house checks the portfolio against its other equity schemes:

For the investor. Rohit puts Rs 2,00,000 into the scheme. Chapter 12 says the higher risk, monitoring and timing of sector funds suit the satellite portfolio, with a diversified portfolio as the core. A thematic fund is less concentrated than a sector fund, but the same reasoning argues against making it Rohit's only equity holding.

Chapter 2 (Concept and Role of a Mutual Fund) defines the thematic category, the 80 per cent and 50 per cent overlap rules, the one-scheme-per-category exception and the ESG sub-category; its sample question asks how many sectoral/thematic schemes an AMC may launch. Chapter 11 covers thematic benchmarks and the single-benchmark rule. Chapter 12 (Mutual Fund Scheme Selection) places thematic funds between focused and sector funds on risk, and its sample question asks which scheme has the lowest concentration risk among a multi-cap, focused, thematic and sector fund.

• Theme ≠ sector. A theme can span many sectors; a sector fund stays inside one.
• Risk order: diversified < focused < thematic < sector. The multi-cap fund has the lowest concentration risk in that sample question.
• 80 per cent, not 65 per cent, of total assets must be in equity of the theme — the same floor as sectoral funds.
• The 50 per cent overlap limit excludes large cap schemes.
• An AMC may run more than one sectoral or thematic scheme, provided they are on different themes or sectors — the one-scheme-per-category rule has this exception.
• ESG funds are a sub-category of thematic funds, not a separate broad category.
• One benchmark, not two — thematic and sectoral schemes are outside the Tier-1/Tier-2 structure.