Electric vehicles, renewable energy and cryptocurrency have become part of our everyday lives and are predicted to be the future. Like them, there are several businesses and sectors which aim to identify advancing market trends and drive investment in growing funds. But how are the two related?
Thematic investing identifies the broader scope of these businesses and sectors in relation to investments. Read on to find out more.
What is Thematic Investing?
Thematic investing is a type of strategic investment plan where you invest in trends instead of individual funds. For example, you believe electric vehicles are going to be the future of the economy because of the global threat of climate change. To support this, you do not need to find companies who only make electric vehicles but you can easily invest in the trend of electric vehicles and their sustainability. The idea of thematic investing is to invest in the theme and not individual funds.
The philosophy of thematic investing lies in 5 megatrends:
- Environmental, social and governance
- Disruptive technology
- Economic power and social change
The confluence of these 5 megatrends in conjunction creates a change in the economy and makes the base of thematic investing. Other than that, thematics is one of the most innovative investment strategies which brings billions of dollars to the government and helps in shaping the future of today through the global economy and society.
Advantages of Thematic Investing
Being an innovative investment strategy, the uniqueness of thematic investing lies in investing for your future by investing in your future. Let us look at the benefits of this investment style.
- It capitalises on the future: Investing, in general, has several risks but thematic investing is slightly different. It capitalises on a future trend and, due to its forward-looking nature, it helps you invest in the future.
- It offers more diversification than sectoral funds: When you invest in broader themes, your investment has a broader scope compared to investing in sectoral funds. There are few diversification opportunities in sectoral funds as you are confined to specific sectors, such as healthcare or pharmaceuticals. Your entire portfolio will be negatively impacted if the sector does not do well in that term. This risk is significantly reduced in the case of thematic investment.
For example, let us take the theme of manufacturing, which is present across sectors and includes car manufacturing, industrial manufacturing, or chemical manufacturing. The portfolio has a diverse set of investments that can be used to diversify funds.
- It can bring unexpected returns: If the theme does great, thematic investing can give you a greater return than expected. For example, no one could have anticipated that the returns from cryptocurrency would be in millions. So, it all depends on developing a keen understanding of the future trends and capitalising on them.
- Risk management portfolio: Thematic investing means that you will be investing in a broader category of shares but also that there are ways to mitigate the risk in the portfolio.
For example, if you choose to invest in the IT sector, you can also choose how you would like to invest in it as well. Do you want to invest in small, mid or large cap investment funds? Suppose as a thematic investor you plan to invest in a mid cap investment fund. Then, this would be considered aggressive, and you are taking a much larger risk in comparison to a large cap fund. Thus, the crux of the matter is that you have leverage to choose what kind of fund you want in the portfolio.
- Lesser research, more investment: The biggest advantage in thematic investing is that you do not have to research a wide array of companies you want to invest in. Rather, you can select a theme after thorough research and analysis and find out how to invest in the said sector. Hence, thematic portfolios reduce the risk attached to particular shares or companies with diversification.
Learn more by downloading the BP Wealth App.
Thematic Funds Vs Sector Funds
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The major difference between these two sets of investment is that sectoral funds are constrained to specific sectors. Thematic funds operate across sectors that have been woven around common themes such as ESG, environmental, etc.
Thematic funds are equity schemes that invest in stocks based on themes and help in diversification. They are open-ended, multi-sector and have a high risk-taking ability.
Sector funds are narrower in comparison and vary in market capitalisation. The sector funds vary from pharmaceutical and real estate to natural resources, communications, etc.
Impact Investing vs Thematic Investing
Impact investing is all about making a measurable social and environmental impact while also meeting financial goals. The three characteristics of impact investment are:
- Intentionality: What are the intentions of the investors behind the investments and how can their investment create solutions? These include issues like poor housing, poverty, etc.
- Additionality: This refers to social impacts that can be achieved with the intentions of investing. An example of this is when a project’s impact goes beyond its initial targets.
- Impact measurement: This involves measuring the elements of impact according to the nature of the investment.
Impact investment focuses more on the effect that can be achieved instead of the area of the impact. On the other hand, thematic investment focuses more on the area than the effect which can be achieved. Thematic investment aims to invest in companies that are planning to focus on the futuristic trends of tomorrow. Here, the investors intend to make sure that they are making informed decisions.
Themes Based Investing for New Investors/Key takeaways
- Thematic investing is based on the idea of capitalizing on future trends and beliefs and building successful strategies around them.
- Do not keep all your eggs in one basket; expand and diversify your portfolio with thematic investing.
- Sector funds are narrower than thematic funds. Hence, go for sectoral investments only if you have in-depth knowledge of the sector. If you don’t, it is advisable to invest in the thematic, which has a broader scope of gain.
- Both sectoral and thematic funds are risky. So, research your theme thoroughly and then start investing in it.
- Thematic investing is the future of investing, involving renewable energy, electric cars, etc.
Learn more about thematic investing on the BP Wealth App
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