Thematic Funds

What is a Thematic Fund?

A thematic fund is an equity-oriented mutual fund that invests in companies connected to a particular theme rather than limiting itself to a single sector. These funds draw stocks from multiple industries that align with the chosen theme. The primary objective of thematic funds is capital appreciation by identifying and investing in businesses that benefit from structural trends.

Thematic funds can also be designed around different investment styles, such as:

• Dividend Yield Funds: focus on companies with high and sustainable dividend payouts.

• Value Investing Funds: invest in stocks that appear undervalued relative to fundamentals but have long-term growth potential.

• Contrarian-style Funds: take positions in companies currently out of favour with the market but expected to recover.

Note: SEBI recognises the above-mentioned investment styles as separate sub-categories of equity funds, not strictly thematic funds. They may overlap with thematic strategies, but are not themes themselves.

Key Features of Thematic Funds

Thematic funds come with distinct characteristics that set them apart from traditional equity funds. Here are the core features you should know:

• Theme-based Portfolio: Investments are built around a single long-term idea, such as manufacturing, technology, or ESG (environmental, social, and governance), ensuring alignment with a central narrative.

• Multi-sector Exposure: Unlike sectoral funds focusing on one industry, thematic funds draw stocks from multiple sectors interlinked with the chosen theme.

• High-risk, High-reward Potential: Since performance depends on the success of the theme, these funds can generate substantial gains during favourable cycles but may underperform when the theme struggles.

• Actively Managed Approach: Fund managers actively rebalance portfolios to ensure they remain aligned with the chosen theme, adjusting holdings as market conditions and opportunities evolve.

• Taxation as Equity Funds: They are taxed as equity-oriented schemes, which may offer long-term wealth creation benefits.

How Do Thematic Funds Work?

Thematic mutual funds follow a top-down approach to investing. Fund managers identify a broad theme or trend with the potential for strong returns. Once the theme is chosen, managers select industries and sectors most likely to benefit from these developments.

By regulation, a thematic fund invests at least 80% of its total assets in equity & equity-related instruments of companies aligned to the selected theme. Depending on the theme's scope, they may include large-cap, mid-cap, and small-cap companies.

Some common examples include:

• Manufacturing & Infrastructure Funds: Invest across construction, utilities, metals, and chemicals.

• Service-oriented Funds: Focus on companies generating revenue mainly through services (not a formal SEBI category, but often used thematically).

• ESG Funds: Invest in companies that adhere to environmental, social, and governance principles.

Difference Between Sector and Thematic Funds

While sectoral and thematic mutual funds focus on specific areas, they differ in scope and diversification. Let’s compare them for better clarity.

Advantages and Risks of Thematic Funds

While thematic funds offer opportunities to tap into emerging trends, they also carry certain risks that investors should be aware of. The table below highlights both sides:

Top 10 Thematic Funds in India

When reviewing the best thematic funds, key factors include 3-year CAGR returns, which show annualised growth, CRISIL ratings (1 - 5 scale based on risk and performance), and the NAV, which reflects the price per unit. With these parameters, here are the Top 10 Thematic Funds in India:

Note: The above data is as of September 16, 2025, and may change with market conditions. Investors should verify with official sources before making decisions.

Who Should Invest in Thematic Mutual Funds?

Thematic mutual funds are better suited for specific types of investors. They mainly include:

• Experienced Investors: Thematic funds are designed for experienced investors who follow the market closely and know when to buy and sell.

• Risk-Taking Investors: Since these funds focus on a single theme (even if it spans multiple sectors), drawdowns can be sharp. They are suitable only for those who can tolerate higher volatility.

• Suitable for Long-Term Investors: Thematic funds align better with long-term wealth creation since sectors and themes often move in multi-year cycles. 

How to Invest in Thematic Funds?

Investing in thematic mutual funds allows you to align your money with specific long-term trends or themes. Here’s a simple guide to get started:

• Select a SEBI-registered Platform: Choose a trusted mutual fund platform or app that provides access to thematic funds and detailed performance information.

• Navigate to Thematic Funds: Go to the mutual funds section and filter by thematic or theme-based funds.

• Explore Fund Options: Check fund details such as risk level, past returns, and ratings.

• Complete the KYC Verification: Provide PAN, Aadhaar, and other required details (DOB alone is insufficient).

• Link Your Bank Account: Add your account details for investment and redemption purposes.

• Select Your Investment Type: Decide between a Systematic Investment Plan (SIP) or a lump sum investment.

• Enter Investment Amount and Confirm: Choose the amount to invest and complete payment through net banking, UPI, or other available methods.

• Track Your Investment: Once processed, your investment units will reflect in your portfolio within a few working days.

Thematic Funds vs. Diversified Equity Funds

When choosing between thematic funds and diversified equity funds, it’s important to understand how they differ in focus, risk, and suitability:

Factors to Consider Before Investing in Thematic Funds

Before investing in thematic funds, it’s important to understand their risks, costs, and suitability. Consider the following points to make informed decisions:

• Investment Risks: Thematic funds focus on a specific theme, making them riskier if the theme underperforms.

• Investment Goals: Be clear about your financial objectives. These funds are best suited for long-term goals, typically 5 years or more, such as retirement or wealth creation aligned with the theme.

• Expense Ratio: The fee charged by fund managers for managing the scheme. It is already factored into the NAV, so investors don’t pay it separately.

• Exposure Limit: A guideline intended to reduce downside risk. However, it is not mandated by SEBI. Fund houses or advisors may suggest such limits to prevent excessive concentration in a single theme or asset class.

• Performance of the Theme: Themes may go through cycles of growth and decline. Studying past and current trends helps in making informed investment choices.

Taxation of Thematic Funds

Thematic funds are classified as equity mutual funds, so their taxation follows equity fund rules. The tax you pay depends on how long you hold the units:

• Short-Term Capital Gains (STCG): Tax on equity-oriented MF units sold within 12 months is 15% for sales up to July 22, 2024, and 20% for sales on/after July 23, 2024 (subject to STT).

• Long-Term Capital Gains (LTCG): For units held more than 12 months, gains above ₹1.25 lakh in a financial year are taxed at 12.5% for sales on or after July 23, 2024 (earlier 10% above ₹1 lakh).

• Dividends: Taxed at your slab rate. TDS @10% applies only if total dividends from a fund house exceed ₹5,000 in a financial year (20% if PAN not provided). No TDS applies to capital gains.

Key Takeaways

Thematic funds allow investors to focus on specific long-term trends by investing across multiple sectors linked to a theme. They offer high return potential but carry higher risk, making them suitable for experienced investors with a long-term horizon. These funds are actively managed and follow equity taxation rules. By SEBI mandate, at least 80% of their assets must remain tied to that single theme, making them far less diversified than a diversified equity fund. If you want to diversify your portfolio with professionally managed options, you can start SIP in the best mutual funds in India.