AN INVESTOR, who is not stock market savvy or is a sceptic, usually plays the market through the mutual funds route as seen in the past many years. But, quite often, when the market is in a bullish mode, mutual fund houses try to ride the sectoral theme in order to catch the flavour of the season.

For instance, healthcare and FMCG shares were the darlings of the investors in 2011, while banking disappointed last year due to tightening of interest rate and concerns about deteriorating asset quality. Similarly, the infrastructure theme did well in 2006 and 2007, but has underperformed significantly in 2010 and 2011.

What are thematic funds?

Broadly, thematic funds operate on themes ranging from multi-sector, international/multi-economy and commodities, to name a few.

So, should one take exposure to these thematic funds at a time when volatility in the equity market continues to remain high and most of the underlying risks have not yet subsided?

In the past that thematic funds have done well when markets are on the up move. Thematic funds are a function of market cycle, function of risk and time horizon calculated by an investor. It is a high-risk, high-return investment and if an investor has an investment horizon of three-four years, these investments would fetch him decent returns.

For novice investors identifying the right theme could be a Herculean task. These investors should invest in mutual funds and ideally, they should stick to diversified equity mutual funds, said an analyst with a mutual fund house, who spoke on condition of anonymity.

Risk profile: Thematic funds by nature are more prone to risk and volatility. The performance of these funds is dependent on the performance of a particular set sector or a theme, unlike a diversified fund that moves in line with the broader markets, said the analyst.

In the past one year, Reliance Diversified Power Sector Fund gave a negative return of 11.59 per cent, while UTI Energy Fund was down 2.7 per cent. Similarly, Sundaram Entertainment Opportunities Fund Retail Growth has delivered a negative return of nearly 16 per cent and Sundaram Capex Opportunities has fallen 10 per cent in the past one year.

Some sector/themes that do well in one year may underperform in another year.
In this case, it is difficult for a retail investor to forecast which theme/sector will do well, on a consistent basis. In that case, investors are better off investing in a diversified equity fund, where they leave that call to an experienced fund manager who can, perhaps, take a better sectoral call, and over/underweight those sectors accordingly.

Options: On the other hand, returns from diversified funds and index-based funds eked out positive returns in the past one year. HDFC Mid-Cap Opportunities Fund registered positive return of 16.4 per cent, followed by Religare Mid & Small-Cap Fund (up 10.1 per cent), DSP BlackRock Top 100 Equity Fund (6.6 per cent), UTI Opportunities Fund (12.9 per cent) and HDFC Top 200 Growth Fund (3.2 per cent).

Investment in mutual funds should be more diversified, if an investor is looking at a one-year point of view. Even, if the market remains upbeat for a longer period in a year, an investor should not go for investing in a particular sector because during correction times, these theme-based funds fall in tandem with the market due to their exposure to a particular theme,.