Why thematic funds are on the rise

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If there is one major sector stock that has gained directly from government policies and reforms in multiple areas, such as electricity, banking, defence, and railways, it is public sector undertaking (PSU) stock.

As per BSE India, S&P BSE PSU Index has given a massive return of 88.7%,172%, and 169% in the last 1, 3, and 5 years, respectively, as of  May 10, 2024.

The domino effect of this development is also very evident in the equity thematic mutual funds that invest in these PSU stocks.

As per Value Research data, the equity thematic PSU funds have given annualised returns of 86.67%,40.83%, and 26.45% respectively over 1,3, and 5 years as of 10th May 2024. Let’s understand more about Thematic PSU funds

What are Thematic PSU funds?

A thematic fund invests at least 80% of its assets in equities related to a specific theme. Thematic funds adhere to a particular theme and are typically more diversified than sector-specific funds, as they include companies from various sectors connected to the fund’s theme.

The various thematic mutual funds that are offered by mutual fund houses include ESG, MNC, Energy, Consumption, and PSU among other themes. The fund managers use a combination of various approaches to identify sectors anticipated to benefit from a specific theme. Fund managers will search for opportunities across market capitalisations to generate potential capital growth over the long term.

Thematic PSU funds invests in PSUs like SBI bank, ONGC ltd, Power Grid Corporation of India, Oil India and Bharat Heavy Electricals among others.

Taxation

The thematic funds fall under the equity category of mutual funds; hence, they are taxed like equity mutual funds. If you redeem before one year, returns are subject to a 15% tax. After a year, you must pay a 10% long-term capital gain tax on returns of Rs. 1 lakh or more in a fiscal year.

Why are PSU thematic funds doing well?

According to market experts, the re-rating of stocks has happened due to the shift in the attitude of the PSU theme towards profitability and expectations from mutual fund investors has gone high. “Government’s view to divest from PSU stocks also further boosts investor confidence that PSU will be managed keeping shareholder interest as a priority,” explains Jay Shah, Founder and CEO of Finwisor.

Returns  

PSU thematic mutual fund scheme such as SBI PSU Fund and Aditya Birla SL PSU Equity Fund have given an annualised returns of 91.39% and 91.24% respectively in last one years as on 6th May, 2024.

Should you invest?

Being an equity mutual fund, the PSU thematic funds still come with high risk, and that is the reason it is only for experienced investors, with only 10% of the total portfolio invested in this type of fund. However, on the flip side, according to the market expert, this might not be the best time for a new investor to invest in PSU thematic mutual funds. “It is not the best time for new investors to invest in PSU thematic funds right now, in our opinion. Given the recent run-up in PSU stocks and the valuation expansion that has already happened, it is unlikely that the next year will yield a fantastic return. However, existing investors may continue to hold on to invest in these schemes for a longer time horizon,” explains Jay Shah, Founder and CEO of Finwisor.

Conclusion Suppose investors are particularly optimistic about the promise of such thematic funds, in that case, they can invest with the help of a financial advisor, but only after analysing all of the risks of particular thematic funds.