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What is Thematic Passive Investing, and How Can You Start?

Not everyone considers investing money in their lives. Still, finding the right approach to investing might be difficult for those who do. If you're an investor looking to diversify your portfolio and explore new opportunities, thematic passive investing could tend to be a good addition to your strategy.

Thematic passive investing means investing in index funds that focus on a particular theme or trend. These funds track a benchmark tied to the chosen theme instead of actively managing your investments or trying to outperform the market. It does not require you to monitor markets or pick individual companies. You allow the mutual fund to track a specific theme that may perform over time.

Want to know more about thematic investing?

The Basics of Thematic Funds: Understanding the Concept

Before covering how to start with thematic passive investing, it’s important to understand the core idea behind thematic funds.

In simple terms, thematic funds are mutual funds that focus on a specific theme or trend, such as clean energy, technology, etc. These funds pool money from multiple investors to invest in companies or sectors that align with the chosen theme.

Thematic passive funds differ from traditional mutual funds (including actively managed thematic funds) because they do not aim to track a broad market index and are passively managed. Instead, they focus on a specific theme that may potentially grow over time.

For example, a clean energy fund would invest in companies working in solar, wind, and other renewable energy sectors. Similarly, a technology fund might focus on businesses innovating in areas like Artificial Initelligence or cloud.

The primary appeal of thematic investing is that it aims to align your investments with your interests or values. It’s a way to focus on future trends instead of trying to predict the performance of specific companies.

Benefits of Thematic Passive Investing

1. Potential for Returns

Thematic passive investing may offer the opportunity for potential growth if the chosen theme performs over time. For example, investing in a fund focused on electric vehicles before the sector's recent growth in the country might have led to positive returns as the industry expanded. While the potential is there, it’s essential to approach thematic investing with realistic expectations and a long-term perspective.

2. Focused Diversification

While passively managed thematic funds spread your investment across multiple companies, the focus remains clear. All your investments work towards the same overarching theme. However, this concentrated approach comes with higher risks involved, as it depends on the success of that particular theme. You can evaluate your risk appetite and ensure it aligns with this investment style before committing.

3. Opportunity to Learn

Investing in thematic passive funds can go beyond managing your money. It can also be a great learning experience. Investing in trending themes allows you to gain insights into new technologies, shifting consumer behaviours, and the dynamics of different industries. This way, you can stay informed about the future of business and social change while building your portfolio.

How Does Thematic Passive Investing Align with Long-Term Goals?

● Flexibility in Portfolio Construction

Thematic passive investing allows you to tailor your portfolio to your long-term financial goals. You can customise your strategy to focus on themes you believe will outperform or invest in areas aligned with personal interests. Also, you can adjust your investments in line with new opportunities or priorities without having to overhaul your portfolio completely over time.

● Compounding Gains Over Time

Passive investing via thematic funds has the potential for compounding returns. As the underlying theme continues to perform well, the value of your investment may grow further and increase overall returns.

Portfolio Resilience

A well-chosen thematic passive fund tend to contribute to the resilience of your portfolio. If industries following the chosen theme continue to grow, investing in them can potentially help build your portfolio in the long run. This approach may safeguard your investments against unforeseen changes in the market.

How to Start with Thematic Passive Investing?

Here’s a step-by-step guide to help you get started:

1. Knowing your financial goals can help you select the right themes/funds. This is where you need to define what you want to achieve, be it long-term growth, alignment with personal values, or exposure to specific themes.

2. Once you’ve set your goals, you can research thematic passive funds you believe in and have long-term growth potential.

3. Then, you need to evaluate the potential risks related to the theme you want to invest in and ensure it fits your risk tolerance. Like any investment, thematic funds come with risks.

4. With thematic passive funds, you can ensure you’re not overly concentrated in one fund. You can consider diversifying across different themes to mitigate risk.

5. If you’re new to thematic passive investing, you can start with a small amount and increase your investment gradually.

6. Lastly, you need to review your investments periodically. As market conditions change and new trends emerge, your investment planning might require adjustments to continue aligning with your goals.

Thematic investing can help you align your portfolio with the future and focus on emerging trends that could reshape industries. With the right investment planning approach, it may be a useful strategy for growth and purposeful investing.

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Disclaimer:
This is an investor education and awareness initiative by Nippon India Mutual Fund.
Helpful information for investors: All Mutual Fund investors have to go through a one-time KYC (know your Customer) process. Investors should deal only with registered mutual funds, to be verified on SEBI website under 'Intermediaries/ Market Infrastructure Institutions'. For redressal of your complaints, you may please visit www.scores.gov.in . For more info on KYC, change in various details & redressal of complaints, visit mf.nipponindiaim.com/investoreducation/what-to-know-when-investing This is an investor education and awareness initiative by Nippon India Mutual Fund.

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