I understand that Value Research suggests investors to avoid thematic funds. But aren't they better than direct stocks?
- Sathyan Reddy
Yes, we generally suggest that thematic funds are avoidable for most investors. However, if somebody has certain specific convictions of specific themes such as infrastructure, pharma, consumption, etc., and wants to build an exposure to a diverse basket of stocks, which are going to be beneficiaries of that particular theme, then I would say that thematic funds can be a worthwhile option to take a certain limited exposure. This would be better than investing directly in stocks because by investing directly, one may not be able to build a diverse exposure to a basket of stocks pegged to that theme. So for this limited exposure, perhaps certain thematic funds might be of appeal to a limited set of investors. But one has to keep in mind that even by investing in a thematic fund, one may need to take more of a tactical approach and think about the right time to exit when one believes that the theme has played out and the companies pegged to that theme are starting to have pretty rich valuations.
But I believe that for most investors, it is easily avoidable and they can stick to vanilla diversified funds and leave all those decisions to a fund manager. Also, keep in mind that the more exotic a fund gets with a certain twist to the investing story, cost tends to rise because things may not be very competitive in those niches. So you end up paying more in terms of expense ratios, while the promise in terms of superior performance may be unproven. So for a vast majority of investors, I would say sticking to vanilla diversified funds can be a better alternative.
