Prima facie theme-based funds are a great way to make big money. Actually, it is all human psychology – what we commonly term as ‘herd mentality’ or as some sophisticated people would say ‘momentum’.
But the problem is you don’t know when the fancy starts or when it ends. It could be months or it could be years. So you could either exit too early and miss the best part of the rally or exit too late when all the cream is gone.
Time and again, something or the other will catch the fancy of the market. And then everyone will rush headlong into it. Once upon a time it was Technology, Pharma or Auto. Today no one even talks about them. Now it’s infrastructure and real estate. Tomorrow, they too would be forgotten.
Moreover, theme-based funds defeat the three very basic ideas of investing in MFs – diversification, professional expertise and regular monitoring.
Firstly, we are concentrating our portfolio and thereby increasing the risk. MF was supposed to be a route to diversify our investment, not concentrate it.
Secondly, we are taking a call on the market as to which sectors will do well. We have entrusted our money to a professional fund manager. Don’t you think we should invest in a diversified fund vis--vis a sector fund and leave it to his expertise and experience to decide on the potential sectors (in fact, that’s precisely his job)? Are we smarter than the fund manager?
Thirdly, since we don’t know when the tide will turn, we need to constantly monitor a theme-based portfolio. Again, we had opted for MF, as we didn’t have much time to regularly monitor our investments.
Given all this, theme-based funds carry a higher risk than diversified funds.
However, if we can’t control our ‘gambling’ impulses, it would be prudent to invest only a small % of our corpus in such sector/theme-based funds.
So, be smart! Don’t be taken in by the media hype. Think twice – no, thrice – before your commit your money to theme-based NFOs