Thematic Investing: A New Way of Investing
Disclaimer: The content below is for educational and informational purposes only and does not constitute investment advice, personal recommendations, or a solicitation to buy or sell financial instruments. Investing involves risks, including potential loss of capital. Past performance is not indicative of future results. Investors should consult a qualified financial advisor or conduct their own research before making investment decisions.
Thematic investing is a future-focused investing method where you invest in themes that are expected to grow over time. This includes clean energy, online shopping, and healthcare technology. Instead of choosing single stocks, a thematic investing strategy builds a thematic portfolio around one idea or trend. Returns are not guaranteed, and investments in thematic strategies may experience significant volatility and capital loss.
In this blog, you will learn what is thematic investing, how investing in themes works, and why thematic investing is becoming popular among long-term investors.
What Is Thematic Investing?
At times, an investing idea is not limited to a single stock, sector, or index. There may be a theme or trend you want to invest in. This is possible through thematic investing.
Thematic investing focuses on identifying broad, structural trends expected to drive growth in the near future. These expectations are based on assumptions and forecasts that may not materialise. The goal here is mainly to develop investment products that let you put your money into ideas and trends that don’t fit into traditional classifications.
Due to its forward-looking approach, thematic investing may appear attractive to some investors. Investors here focus on creating value from trends that may unfold over several years or decades. This suits those who believe in the potential of innovation, policy changes and evolving consumer behaviour. The suitability of this strategy depends on an investor’s objectives, financial situation, and risk tolerance.
Understanding Thematic Investing
Ever thought you could invest in the future or something that is trending? That’s what is called thematic investing. Thematic investing is a top-down investment philosophy that uses broad macroeconomic trends to analyse investment options. It focuses on aligning investment decisions with noticeable social, corporate or economic trends.
Remember when smartphones came out? Suppose you had invested in companies which make smartphones or apps back then. Then you might have achieved significant returns. This is because smartphones were a trending theme that changed the world. This example is for illustrative purposes only and does not represent any specific investment or guarantee of future performance.
How Does Thematic Investing Work?
Thematic investing involves investing in themes and popular trends such as digitalisation, clean energy, aging populations, and online shopping. Investors choose funds and companies that fit such themes, which span several industries. Sector and theme references are provided for informational purposes only and do not constitute a recommendation.
Identify Themes
First of all, you will need to identify themes that you believe will have a significant impact on the global economy in the near future. For this, you can consider factors such as market size, growth potential, and the competitive landscape. Assessments of impact and growth potential are inherently uncertain and may change over time.
Research
Now you shall conduct proper research on industries and companies which have your chosen themes. For this, you will need to read industry reports, analyse financial statements, and even stay updated with industry news. Research does not eliminate investment risk and should form part of a broader investment assessment.
Selection
One shall invest in a diverse set of companies within each theme to minimise the risk. You can do this by investing in individual stocks or through exchange-traded funds (ETFs) that focus on specific themes. Diversification does not eliminate risk, and thematic ETFs or stocks remain subject to market fluctuations.
Monitor and Adjust
You shall regularly review your investments to ensure that they align with your chosen themes and goals. Also, be prepared to bring changes to your portfolio if market conditions change. Frequent adjustments may result in transaction costs and may affect overall returns.
Popular Themes to Explore
If you are planning to create a thematic portfolio, then here are some popular themes: -
Technology and Digital Transformation
Technology is one of the most popular themes, including cloud computing, artificial intelligence, fintech, etc. Businesses focused on digital payments, automation, and cybersecurity are the prime focus here. These examples are illustrative and do not constitute investment advice or a recommendation.
Clean Energy & Sustainability
With global awareness of climate change, clean energy solutions and sustainable infrastructure are emerging. This theme is driven by accelerating government policies which globally aim for net-zero emissions by mid-century. Regulatory and policy developments may significantly impact the performance of companies within this theme.
E-Commerce and Online Shopping
Rapid growth in online shopping is reshaping the retail industry. Investing in ecommerce means focusing on companies that operate or support online marketplaces, payment systems and logistics services.
Sustainability and Ethical Investing
Those businesses that have focused on social impact, environmental responsibility, and good governance are attracting increased investor interest. Capital allocation in several industries is impacted by this approach. Investor sentiment may change, affecting valuations and performance.
Benefits of Thematic Investing
Let’s go through the main benefits of thematic investing:
Potential For Higher Returns
You may achieve higher returns if a selected theme performs strongly. Imagine if you had invested in ecommerce before online shopping became a huge thing, your investment might have generated significant returns. Past thematic success does not guarantee future results.
Long Term Exposure
Investors can potentially benefit from themes that can materialise across decades. This can be done by focusing on structural trends such as clean energy and digital adoption. Long-term exposure does not eliminate short-term volatility or capital risk.
Future Focused Investing
Thematic investing is a form of future-focused investing because the portfolio is designed with the economy and consumer behaviour in mind, rather than focusing on historical performance. Forward-looking strategies rely on projections that may not be realised.
Adequate Diversification
A thematic investment strategy distributes funds across companies and sectors, ensuring a degree of diversification within the chosen theme. However, concentration within a single theme may increase overall portfolio risk.
Personal Connection
You get a chance to invest in concepts that you support, like healthcare innovation or renewable energy. Hence, this feels more appealing to many investors. Personal interest in a theme should not replace objective financial analysis.
Risks and Challenges of Thematic Investing
There are certain dangers too in investing in themes. Let’s understand them:
Higher Volatility
Investors' sentiment towards a trend or theme is often reflected in the movement of thematic funds. Hence, they are often more volatile than broad market funds. Higher volatility can lead to significant short-term losses.
Timing the Theme
Timing matters a lot in theme investing. If you start investing in a theme after it has lost popularity, you may see fewer gains.
Limited Track Record
Many themes lack a strong track record of performance, as they are quite new to the market. Hence, investors find it challenging to assess their performance.
Uncertainty of Trends
It’s not necessary that all themes perform as planned. Certain themes may play out more slowly over time. Hence, it may not deliver the expected returns.
Conclusion
Thematic investing is a modern investment approach. Here, you can invest in global trends such as clean energy, artificial intelligence, and innovative healthcare. You can identify themes that can relate to you and invest in them. But do remember to conduct proper research before investing. You can research newsletters and financial reports for this. Investment decisions should be based on careful consideration of your financial objectives and risk tolerance.
Thematic investing has the potential to generate higher returns. It also offers diversification benefits. But you shall also not forget that it comes with the risk of high volatility. Hence, you shall invest after considering all factors. All investments involve risk, and capital may be at risk.
Disclaimer: This content is for educational purposes only and does not constitute investment advice, personal recommendations, or a solicitation to buy or sell financial instruments. All investments involve risk, including potential loss of capital. Investors should consult professional financial advisors and consider their personal circumstances before making any investment decision.
