Most of the new investors start investing through mutual funds. But choosing the right fund is difficult. There are many options to choose from: various asset classes, levels of risk, and firm sizes. An option is thematic funds — mutual funds that invest in companies linked to a specific niche theme or long-term trend.

In this article you will learn what thematic funds are, how they work, their advantages and risks, and what to check before you invest.

What is a Thematic Mutual Fund?

A thematic fund is a mutual fund that invests across industries and sectors that match a chosen theme. The goal is to make money by focusing on a theme that may grow in the future.

• The fund picks a theme (for example: clean energy, manufacturing, or services).
• Fund managers choose companies from different sectors that fit the theme.
• They watch things like economic changes, technology, consumer habits, and government rules to pick the best companies for the theme.

How Do Thematic Mutual Funds Work?

Thematic funds use a top-down approach:

1. Pick a theme — a trend that may grow in the future.
2. Find sectors and industries that will benefit from that theme.
3. Invest mainly in those sectors and industries.

By rule, a thematic fund invests at least 80% of its money in companies that match its theme. Most thematic funds are equity funds, so their portfolios include stocks of small, mid, and large companies.

Examples of themes:

• Manufacturing & Infrastructure: companies in construction, utilities, metals, chemicals.
• Services: companies that mostly earn from services.
• ESG: companies that follow environmental, social, and governance norms.

Thematic Funds vs Sectoral Funds

People often mix up thematic funds with sectoral funds. Here is a simple comparison:

Point	Thematic Funds	Sectoral Funds
Meaning	Invest across sectors that fit a broader theme or trend.	Invest only in one specific sector (like banking or IT).
Risk	Moderate to high, depending on theme and sectors.	Higher risk because of focus on one sector.
Diversification	Better diversification across industries and company sizes.	Less diversification — focuses on one industry.
Investment horizon	Good for long-term investors who believe in a theme.	More suitable for short- to medium-term bets on a sector.
Example	Theme: manufacturing & infrastructure across many industries.	Sector: only construction companies.

Key Features of Thematic Funds

• They target a specific theme or rising trend.
• The main aim is to invest in sectors that will benefit from that theme.
• They offer more diversification than pure sector bets because they can include several industries and company sizes.
• They are actively managed — fund managers change holdings based on new developments.

Advantages of Thematic Funds

• Broader exposure: They can invest across industries that link to the theme.
• Diversification: Spreads risk so your money isn’t only in one sector.
• Early growth potential: Investing early in a theme may lead to big returns if the theme grows fast.

Risks of Thematic Funds

• Market risk: Bad market conditions can cause poor returns or losses.
• Policy and geopolitical risk: Changes in laws, interest rates, or global events can hurt performance.
• Theme risk: If the chosen theme does not grow as expected, the fund can underperform.

Who Should Invest in Thematic Mutual Funds?

Thematic funds might suit you if:

• You have a long-term view and can wait for the theme to grow.
• You are ready to take moderate to high risk.
• You understand the market and the specific theme you are betting on.

Things to Consider Before Investing

• Know your goals: What are you saving for? How long can you wait?
• Know your risk profile: Can you afford ups and downs in value?
• Study the theme: Research how the theme may grow and what risks it faces.
• Compare funds: Look at the fund manager’s record, expense ratio, and past performance.

Top Thematic Mutual Funds in India (Data as of July 28, 2025)

Here are some high-performing thematic funds and their 3-year annualised returns (as provided):

• Invesco India PSU Equity Fund Direct Growth — 36.48%
• SBI PSU Direct Plan Growth — 36.36%
• Aditya Birla Sun Life PSU Equity Fund Direct Growth — 33.86%
• Franklin India Opportunities Direct Fund Growth — 33.30%
• 360 One Quant Fund Direct Growth — 28.39%
• ICICI Prudential Manufacturing Fund Direct Growth — 28.33%

Note: These numbers are for reference and show past performance. Past returns do not guarantee future results.

Taxation of Thematic Mutual Funds

Thematic funds are taxed like other equity mutual funds in India. The tax you pay depends on how long you hold the fund:

• Short-term capital gains (STCG): If sold within 12 months, STCG rules apply.
• Long-term capital gains (LTCG): If sold after 12 months, LTCG rules apply (with specific limits and exemptions as per tax law).

Always check the current tax rules or consult a tax advisor before investing.

Conclusion

Thematic funds allow investors to wager on a particular trend or concept. They give a way to focus on promising themes while still offering some diversification. They can give high returns if the theme grows, but they also carry higher risk. Before investing:

• Study the theme and the fund.
• Understand your goals and risk tolerance.
• Compare funds and check fees.
• Consider seeking help from a financial advisor.

Investing wisely means learning about the theme, watching market changes, and making choices that fit your plan.

Learn More:

• Difference in Expense Ratio Between Direct and Regular Mutual Funds
• Best Small-Cap Index Funds
• 10 Debt Mutual Funds That Outperformed in the Last 1 Year with 10% to 24% Returns
• Best Mutual Funds for Senior Citizens
• Best Green Hydrogen Stocks in India

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FAQ: Thematic Funds