Here are four thematic mutual funds that have consistently outperformed the Nifty 100 Index and Nifty Large Midcap 250 index (dividends included) over every possible 1,2,3,4,5 year periods since inception. The SEBI categorization rules have clubbed fund that invests in a particular sector or particular theme in the same category “sectoral/thematic”. For the purpose of this post, we shall refer to them as thematic funds.
Before we begin, are you working with a fee-only financial planner from my list? If yes, can you please fill this feedback form? Please help if you are working with a fee-only financial advisor. We have already received 390 responses. I am hoping we can make it close to 500 before I present the results to the planners. I shall also share them here.
Who should invest in thematic mutual funds?
A thematic or sectoral fund is by construction more volatile than a diversified equity mutual fund (even small cap funds) so only those who have a clear plan and know what they are doing should opt for these. While in general, I do not recommend these, there are some ways
Building a Diversified Equity Portfolio with Sector Mutual Funds. Here your equity portfolio has only 3-4 thematic funds. The diversification is guaranteed and your focus it is the overall equity portfolio return and not individual thematic fund return. This will take a lot of conviction to carry out.
Use it as a satellite portfolio. Your core equity portfolio has, say two diversified funds (one large cap, one mid cap) and you wish to add a thematic fund as a satellite. Maybe 5%-20% exposure. Too small an exposure may not make a difference to your portfolio, but if it makes you happy go ahead. However, periodic rebalancing is crucial. That is, if the thematic fund falls, you shift some gains from your core equity folio. If your thematic fund gains, you shift some gains to your core equity folio.
Use it part of your core portfolio (A). Some funds (and this is a pretty short list) like MNC funds or ESG funds could be used as a replacement for a large cap or large and mid cap funds by well-informed investors. See for example: Can I invest in MNC Funds? Review: UTI MNC Fund vs ABSL MNC Fund
Use it part of your core portfolio (B) If you understand a sector or theme well (or have more information about it than the general public, maybe because you are a subject expert or access to those), but not interested in picking individual stocks (probably a better, less expensive option), can consider thematic/sectoral funds. However, the basics of portfolio management will still apply!
How were the four thematic mutual funds selected?
Using the Aug 2019 Equity Mutual Fund Performance Screener, we compare 78 thematic funds with Nifty LargeMidcap 250. We then ask, how many of these funds have beat the index at least 70% of every possible 3,4 and 5-year durations. The answer is 14 (just 18%). We shall refer to this as return outperformance.
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Then we ask, out of these 14 funds, how many tend to fall lower than the index when the index falls over 3,4,5 year periods. The answer is 6 (about half). We shall refer to this as risk outperformance.
Next, we look at the 1 and 2 year periods and filter out funds that have less than 60% risk and return outperformance. So two funds drop and we are left with four.
Disclaimer: Readers interested in the following funds are advised to read the individual fund scheme documents, understand the nature of the scheme and its risks. I do not hold any positions in any of these funds.
Franklin Build India Fund – Direct Growth
Aditya Birla Sun Life India Gennext Fund – Growth – Direct Plan
Mirae Asset Great Consumer Fund – Direct Plan Growth
SBI PSU Fund – DIRECT PLAN – GROWTH
The first is an infra fund. The next two are FMCG funds and the last is a PSU fund (surprised?!)
Four additional thematic funds that have beat Nifty 100 TRI
Now, the above analysis was repeated with Nifty 100 TRI and in addition to the above funds, the following four funds have also done well.
ICICI Prudential FMCG Fund – Direct Plan – Growth
Sundaram Rural and Consumption Fund – Direct Plan – Growth Option
Canara Robeco Consumer Trends Fund – Direct Plan – Growth
DSP Natural Resources and New Energy Fund – Direct Plan – Growth
Just to reiterate, Franklin Build India Fund, Aditya Birla Sun Life India Gennext Fund, Mirae Asset Great Consumer Fund, SBI PSU Fund have outperformed both Nifty LargeMidcap 250 TRI and Nifty 100 TRI as per the above-mentioned norms.
Finally, let me explain why the above benchmarks were chosen and not the individual sectoral benchmarks. As an analyst, sectoral benchmarks make sense. As an investor, I need to know if the additional risk I take in investing in a thematic fund is worth. Hence the decision to use a large cap index (Nifty 100 TRI) and 50% large cap + 50% mid cap index (Nifty large mid cap 250 TRI).
