Thematic funds are a type of equity mutual fund that invests in companies connected by a specific investment theme. These themes can include infrastructure, digital transformation, consumption, sustainability, manufacturing or public sector undertakings (PSUs). In line with SEBI regulations, these funds invest at least 80% of their assets in equity and equity-related instruments linked to the selected theme.
Unlike sectoral funds, which invest in only one sector, thematic funds spread their investments across different sectors that support the same theme. This provides relatively wider diversification while maintaining a focused investment approach. As a result, the fund's performance largely depends on the growth and success of the chosen theme.
Thematic funds have the potential to generate attractive returns when the underlying theme performs well. However, they can also be more volatile and carry higher risk if the theme does not perform as expected.
In this article, we will explain thematic PSU mutual funds, their meaning, how they differ from other equity mutual funds, their benefits and risks, and the key factors to evaluate before investing.
What are Thematic PSU mutual funds?
Thematic PSU mutual funds primarily invest in shares of public sector undertakings (PSUs). Public sector undertakings are companies where the government of India or the various state governments hold the controlling stake (51% or more). These entities often play a significant role in various key sectors of the Indian economy such as energy, infrastructure, banking and financial services and capital goods.
Although the portfolio of stocks may vary depending on the type of thematic PSU mutual fund you choose, most funds have stocks across multiple industries and market capitalisations to diversify risk.
Who should consider investing in thematic PSU mutual funds?
Now that you know what a thematic PSU mutual fund is, let us look at who this mutual fund is for.
If you are looking to gain exposure to some top-performing public sector undertakings across multiple sectors and industries, you could consider investing in thematic PSU mutual funds.
That said, despite the inherent diversification, thematic PSU mutual funds still carry a high level of risk since the portfolio is concentrated on public sector undertakings. So, if you are an investor with a fairly high level of risk tolerance and a long-term investment horizon, you may find these funds suitable.
However, remember to conduct thorough research and compare multiple thematic PSU mutual funds to ensure that they match your risk tolerance level and investment objectives before you invest in these funds. Invest in thematic PSU mutual funds or 1000+ other mutual fund options on the Bajaj Broking website.
Taxability of thematic PSU mutual funds
- When you redeem or sell units of a thematic mutual fund, any profit earned is treated as a capital gain under the Income-tax Act, 1961.
- The type of capital gain depends on the holding period, which is the time between the date you purchased the units and the date you redeemed them.
- If you hold the units for 12 months or less, the profit is classified as a Short-Term Capital Gain (STCG).
- If you hold the units for more than 12 months, the profit is classified as a Long-Term Capital Gain (LTCG).
- The applicable capital gains tax on thematic mutual funds is determined based on whether the gain is treated as a short-term or long-term capital gain.
- Understanding the holding period before redeeming your investment can help you estimate your tax liability and make informed investment decisions.
- As tax rules may change from time to time, it is advisable to check the latest provisions under the Income-tax Act, 1961 before redeeming your mutual fund units.
