Should you invest in passive thematic MFs? | Economic Times

Of late, AMCs have been filing a flurry of NFOs for index-based funds in the thematic space. Nippon India S&P EV Index Fund, Tata MSCI Domestic Digital Opportunities Index Fund, Mirae Asset Electric Autonomous Vehicle ETF Fund of Fund, Tata New Age Digital ETF and Mirae Asset Nifty India Manufacturing ETF, are among recent filings. Clearly, AMCs are looking to innovate in the passive space through exotic offerings. But should you bite?For many years, index funds and ETFs in the country came in the form of plain-vanilla offerings mimicking a frontline index. With actively managed funds dominating the landscape, not much innovation was seen in the passive space. In recent years, as interest in passive strategies rose, this arena has seen new flavours being added. Newer index funds and ETFs now offer a ride on broader indices like Nifty Midcap150, Nifty Smallcap250 and Nifty500. Further, several factor-based or smart-beta funds are now offered in the passive space, tweaking a base index into an enhanced version based on specific attributes. Even as investors grapple with this flux of passive offerings, another wave of index funds and ETFs are coming through, riding a specific theme. These funds are essentially riding an index based on a targeted theme.Thematic funds are nothing new—these have been offered in various forms in the active space. Such funds are typically timed to capture investors’ love for newer, differentiated ideas. Since there are no limits on how many thematic flavours an AMC can offer, this freedom is exercised with impunity. Several new thematic funds have been launched in the active space over the past year. ESG, special opportunities and business cycles are some prominent themes lapped up by investors. AMCs now seem to be intent on jumping on this bandwagon in the passive side too. In the passive segment, there are no restrictions on the number of funds that can be offered in any category. Rushabh Desai, an Amfi registered mutual fund distributor, observes, “Clearly, with inconsistent showing by active funds in recent years, interest has shifted towards the passive segment. Here too, AMCs are moving towards differentiated offerings to keep the flows going.”A new wave of index-based thematic funds are round the corner 87039563These thematic indices may seem promising concepts but are yet to establish credentials as sustainable, long-term bets. In the absence of a track record, pursuit of these strategies amounts to adventurism, insist experts. Like with active thematic offerings, investors need to tread cautiously. Desai says, “AMCs may be intent on catching trends early, but many of these newer themes are at a very nascent stage. Investors must be prepared for more cyclicality in performance of these offerings.” Even so, go for these only if you are convinced about the potential of the underlying theme, and wish to take dedicated exposure to it. Vidya Bala, Head – Research, PrimeInvestor.in, asserts, “Opting for a separate thematic fund can work in areas where diversified funds are constrained in taking meaningful exposure.” But do not invest in these in the blind pursuit of higher return. Keep any thematic exposure limited to 10% of your portfolio.Besides, investors need to explore and study individual offerings separately, even within the same theme. This is because the underlying index for one fund may differ from another riding the same theme. For instance, Nippon India S&P EV Index Fund is based on S&P Kensho Electric Vehicles Index, which represents companies focused on producing electric road vehicles and associated subsystems, powertrains, energy storage systems, clean fuel tech and charging infrastructure. Meanwhile, Mirae Asset Electric Autonomous Vehicle ETF FoF mimics the Solactive Autonomous & Electric Vehicles Index which targets the same mix of businesses. However, the constituents and construct of the two indices bear little resemblance to each other. As per the latest factsheet, the top five bets in the former include Aspen Aerogels Inc, Li Auto Inc, XPeng Inc, Fisker Inc and Tesla. The other fund’s portfolio counts Tesla, Alphabet, Nvidia, Microsoft and Apple among its top bets. Navi Electric Vehicles and Driving Technology FoF is based on another index with a completely different composition. This disparity between index-based offerings may also be found in any other theme. Investors would do well to look underneath the hood of each offering before opting for one. “These offerings are more suited to investors who understand the drivers behind the theme and risks involved,” insists Bala.An index-based thematic fund would be a better choice over an active strategy around the same theme. A thematic fund in itself is a high-risk, concentrated bet. Adding a layer of individual fund manager’s perception in-stock selection within such a bet only adds to the risk. An index would offer a more scientific, rules-based exposure to the theme. Bala reckons, “A hands-free approach makes more sense while taking exposure to these newer themes. There is no fear of the fund manager making wrong choices.” Desai concurs, “If the target industry is yet to get fully developed, it is advisable not to experiment through an active strategy.”