What is this strategy? How do you go about choosing investment options using this approach? And what are the benefits associated with it? Come, let’s find out.
What is the idea behind thematic investing?
Thematic investing is a top-down investment strategy that focuses on broad, macroeconomic factors in the economy. It is particularly useful for investors with a long-term perspective, because it lays emphasis on identifying long-term future expectations and investing accordingly. In other words, it involves identifying some potential themes that are likely to follow an uptrend in the near or far future.
For instance, in the current scenario, digitization is on a rise. Digital service providers are likely to have a bright future. An investor who recognizes this trend will look for investment options that capitalize on this theme and include the equity of companies in this sector in their investment portfolio.
A thematic investment portfolio is closely aligned with the investor’s beliefs and expectations for the future. For this reason, it’s important that as an investor, you do a lot of research before you pick thematic funds to invest in.
How is a thematic investment portfolio constituted?
In thematic investing, the investment options in an investment portfolio are narrowly diversified. In other words, they’re only diversified across the stocks that fit in with the purpose of the theme. So, to use thematic investing to constitute your investment portfolio, you need to begin by identifying the theme or themes you’d like to invest in.
Once you’ve identified the themes for your investment portfolio, you need to pick the stocks that fit in with the same ideology. Fundamental analysis can be of great help here. If you’re having trouble identifying the right stocks across the themes you’re interested in, there are many thematic funds that you can choose from.
Retail investors like you can benefit from the professional expertise of the fund managers who’re in charge of these thematic funds. These experts choose a theme or a trend that they expect will gain popularity in the future. To identify these themes, fund managers and analysts study the various developments that occur across verticals in the society and the economy. Once a theme has been identified, fund managers proceed to analyze if the said trend is speculative or substantiated by solid data points, and check if it’s a short-term development or a long-term possibility.
Based on their findings, fund managers then identify specific companies or ETFs that fit in with the theme and include those companies in the thematic fund after analyzing multiple metrics like the risk, liquidity, performance and other estimates associated with those stocks.
And aside from the expertise that fund managers bring to the table, there are also several other benefits of thematic investing. Let’s take a closer look at some of these advantages.
What are the benefits of thematic investing?
The benefits of thematic investing include value-oriented investment, concentrated diversification and an exposure to future-oriented investment options. We discuss these in detail below.
1. Value-oriented investment
With thematic investing, you can align your investments with your values and beliefs. For instance, even if you are environmentally conscious, you can invest in ESG funds. This is not the case in traditional investing, where your investment options may not always align with the values and principles you believe in.
2. Concentrated diversification
Thematic investment options are sufficiently diversified across the theme. At the same time, they’re not overly diversified. So, this strategy helps you toe the fine line between over-diversification and under-diversification. Over-diversification can dilute your returns while under-diversification can increase your risk.
3. Exposure to future-oriented investment options
Thematic investment options in your investment portfolio help you capitalize on long-term, futuristic trends. They allow you to earn from the businesses of the future. This is perfect for investors with long-term goals, since they can put their money on the themes and the trends that will likely be at the top of the game in the years to come.
So, you see, the idea of thematic investing is very future-oriented and macroeconomic in its outlook. This strategy includes themes like healthcare, millennial themes like gaming and cybersecurity, disruptive technologies like AI, ML and blockchain, and ESG investing. If you’re a cautious investor who’s still keen on investing thematically, it may be a good idea to allocate a small portion of your investment portfolio to thematic investment options. You could start there and build upon it over the long term.