Thematic funds took the lead in 2025 offering investment in fast-moving trends, such as artificial intelligence, clean energy and digitized health. Global assets in thematic funds jumped from $269 billion to $562 billion over the last five years by mid-2024 reflecting a significant increase in trend-based investing.
Similar story in India, the assets under management (AUM) under thematic and sectoral funds jumped to ₹4.45 lakh crore between August 2019 and August 2024. To learn more about thematic funds and how you can use them to your portfolio’s advantage, continue reading this blog.
What are thematic funds?
Thematic funds are a type of equity fund that aim to invest in companies that share a common factor, such as a specific idea, trend, or theme, like technology, ESG (Environmental, Social, and Governance), or healthcare innovation.
In contrast to sector funds that target a single industry, thematic funds can incorporate companies from different industries as long as they correspond with the main theme. Thus they provide not only targeted exposure but also diversification. For example, while a technology sector fund would invest only in IT companies, an infrastructure-themed fund could include stocks from cement, steel, construction, and capital goods companies-all linked by the infrastructure development theme, even though they belong to different sectors.
Managers of the funds make portfolio selection and adjustments according to the extent of research and the new prospects of the theme chosen, thus picking up the changes as the trends develop. This strategy enables investors to benefit from the opportunities freshly appearing across the sectors, however, it also signifies that thematic funds might be more volatile than broadly diversified funds due to the concentration of their focus.
Also Read: Sectoral vs Thematic Indices: Understanding Market Trends
How thematic funds work
Thematic funds work by monitoring broad trends – such as renewable energy, digital innovation or demographic change – and selecting companies that may benefit from those trends.
Fund managers use detailed research to identify relevant companies, often across multiple industries that contribute to or are impacted by the theme. At least 80% of the fund’s assets are invested in stocks aligned with a particular sector or theme. For example, a clean energy fund might include wind turbine manufacturers, battery producers and electric vehicle companies.
The active management of these funds allows for ongoing adjustments as the market evolves or new opportunities arise within the theme. Fund managers review and rebalance the portfolio to ensure it is in line with the latest developments. Looking at which stocks appear in similar thematic funds can give you insight into market consensus and the companies most closely associated with the trend.
Benefits of thematic investing
As thematic investing gains traction in India, it offers several compelling advantages for investors seeking both growth and alignment with evolving market trends.
- Targeted opportunities: India saw record inflows of ₹1.40 lakh crore in thematic and sector fund schemes in 2024, demonstrating strong investor confidence and growing interest in focused investment options to capture trends and growth possibilities within specific sectors.
- Potential for better returns: They give investors a chance to match their portfolios with fundamental changes in the economy and with values they share personally, like investing in sustainable growth, technology, or healthcare innovations.
- Diversification of investment style: Thematic funds improve portfolio diversification by going for many sectors and industries across the board that match a given theme, hence, reducing dependence on one industry and partly solving the risk issue.
Also Read: Equity Mutual Fund AUM Rises by 40% in 2024, Now Contributing 46% to Industry Total
Risks of thematic investing
While thematic funds offer unique opportunities, investors should be aware of the specific risks associated with this focused investment approach.
- Thematic funds in India are most often more volatile and carry higher concentration risk. This risk arises from the fact that their performance is very much dependent on the fortunes of one single trend or sector instead of a broadly diversified portfolio.
- The liquidity risk is even greater, especially in the funds which are concentrated on very narrow themes or stocks that are less frequently traded. Thus, it becomes more difficult to exit positions during market stress.
- Additionally, thematic funds are exposed to timing risk, as returns depend on the theme remaining relevant and performing within the expected timeframe. If the theme falls out of favor or its growth is delayed, fund performance may be negatively impacted.
Popular themes and data-driven insights
With thematic investing gaining momentum, some powerful trends are driving investor choices in 2025.
- This year’s top investment themes are driven by transformational opportunities, with renewable energy, healthcare innovation and the digital economy leading as sectors in greatest demand.
- In FY25, out of 70 new fund offers launched in the equity category, 52 were thematic or sectoral funds. These funds collectively mobilised ₹73,633 crore, nearly three times the amount raised by sectoral/thematic NFOs in the previous year.
- Thematic funds now account for 15% of India’s total equity mutual fund AUM as of March 2025, making them the largest equity sub-category.
- As of April 2025, the equity mutual fund categories which had the highest AUM growth were sectoral/thematic funds and that was recorded at 49.94% year-on-year.
These observations underscore the increasing prominence of innovation and sustainability in today’s portfolios.
Also Read: ESG Investment Strategies and Sustainable Investing
Conclusion
Thematic funds enable investors to access transformative trends including artificial intelligence, clean energy, and digital health sectors while maintaining sector diversification and specific market exposure.
Their focused composition creates higher market instability which requires investors to make deliberate choices and maintain continuous supervision.
Data-driven insights enable investors to track enduring patterns along with fund evaluation which helps them select appropriate thematic funds as portfolio elements within an intelligent investment strategy.
FAQs
An investment theme is a general concept or trend in the market, such as renewable energy, which determines the investment focus but is not directly involved with the investment. A thematic fund is a managed fund that collects investors’ money to invest in companies that are consistent with a certain theme, thus providing not only the target exposure but also the diversification across the sectors.
Thematic investing is a method to match your portfolio with strong long-term trends such as technological innovation, clean energy, or demographic changes, instead of restricting your investments to conventional sectors or regions. It also gives you the chance to benefit from new opportunities, spread your investments across industries that are connected by a single theme, and invest in areas that mirror your values and interests, thus possibly increasing both growth and involvement.
Thematic funds influence the fund value by directing investments into companies in line with a particular trend or theme, for example, technology or clean energy, that may result in higher returns if the theme is favourable. On the other hand, this concentration deepens the swings and dangers, as the fund’s value becomes more volatile due to changes in the theme’s outlook than diversified funds. Besides, active management and market timing have a significant impact on performance and value.
A thematic fund manager is an investment professional in charge of a fund that targets a particular theme. Examples of themes are technology, clean energy, and healthcare innovation. They pick out trends, find companies that fit the chosen theme, and continue managing the portfolio to have the highest return while controlling risk. Thematic fund managers rely on research and market analysis to make changes in holdings based on trend development and utilise new opportunities for investors.
Examples of thematic funds include technology funds specialising in artificial intelligence, clean energy funds investing in renewables and electric vehicles, healthcare innovation funds with an emphasis on biotech, and ESG funds prioritising environmental and social responsibility. Other themes are manufacturing, PSU, and MNC funds. Each one invests in companies that are in-line with its theme, thus providing targeted exposure across multiple sectors.
