Thematic PSU Funds: Value For Money

From the fun of theme parties to the depth of thematic investing, explore how focusing on specific themes can shape your investment journey. Various investment themes are trending these days, with thematic PSU funds being one of them. Rakesh Deshmukh takes a closer look at the scenario [EasyDNNnews:PaidContentStart]

The word ‘thematic’ itself explains the idea—it’s all about focusing on a specific theme. Instead of spreading attention across different areas or topics, thematic investing zooms in on one idea. You probably have attended a theme party in your life or thrown a theme party for your friends or colleagues, whether it was centred on vampires, Hindi movies, vintage aesthetics, pirates, superheroes, or any other captivating concept. The essence of a themed party lies in guests immersing themselves in the theme, dressing up as characters or personas according to the chosen theme’s context complete with appropriate outfits and accessories. 

Similarly, thematic funds also focus on different themes such as energy, technology, MNCs, financial services, PSU, etc. Thematic funds are a type of equity fund that invest in stocks of companies focused on specific themes. These funds aim to capitalise on emerging opportunities by investing in sectors aligned with themes such as manufacturing, innovation, real estate, transportation, technology and pharmaceuticals. Thematic fund investors are able to gain exposure to a focused area of the market that is judged to experience strong growth in the future. 

Thematic funds offer investors a way to invest in broader trends and ideas they believe in or expect to shape the future economy. However, are you mixing up sectoral and thematic funds? Let us clarify. Thematic and sectoral funds both invest in companies in a specific industry or sector. The main difference between the two is that sectoral funds focus on companies within a specific industry while thematic funds focus on companies that are related to a specific theme or trend. Thematic funds invest in a theme that embodies an idea or a goal encompassing multiple sectors. 

Consider, for example, the theme of electric vehicles (EVs). Here the fund not only invests in companies engaged in the production of EVs but also adds infrastructure providers like charging stations, technology solutions providers, battery manufacturers and EV component manufacturers to the portfolio. As we can see, all these belong to various industries or sectors, but since they depend on a particular theme, which is ‘EV’ here, they may be present in the portfolio of the fund. We hope this explanation clarifies your confusion between sectoral funds and thematic funds. 

Understanding Thematic PSU Funds
Thematic PSU funds refer to mutual funds that focus on investing in public sector undertakings (PSUs) within a specific theme or sector. These are companies owned and operated by the government. These funds typically invest a significant portion of their assets, usually around 80 per cent, in stocks tied to a specific theme or trend. According to the latest records, there are a total of 77 stocks in the portfolio of President of India (PSU stock owned and managed under the portfolio of President of India, by the government). The current value of the portfolio stands at around Rs 42.65 lakh crore. The portfolio is diversified across sectors such as banking and finance, infrastructure, defence, shipping, railways, mining, oil marketing companies, metals, insurance, fertilisers, and so on. 

Thematic PSU Funds’ Performance
In this section, we are exploring the returns these funds have delivered in the past, as well as comparing the funds’ average returns with the benchmark return. 

As per the data, thematic funds, on an average, have matched the performance of their benchmark returns. The major difference in the returns is evident in the one-year timeframe, where the benchmark index has delivered a return of around 101.70 per cent, while during the same period, the average return of these funds is 92.82 per cent. 

Inflows and AUMs of Thematic and Sectoral Funds (Last One Year) 

According to the provided data, there has been a consistent upward trend in the inflows of thematic and sectoral funds in FY24. For the month of February, thematic and sectoral funds attracted the highest inflows of Rs 11,263 crore followed by Large-Cap and Mid-Cap funds at Rs 3,157 crore, Small-Cap funds at Rs 2,922 crore and mid-cap funds at Rs 1,808 crore. Meanwhile, in March 2024, the inflows reached Rs 7,917.72 crore. Note that the Association of Mutual Funds in India (AMFI) does not provide separate monthly inflows data for thematic funds and sectoral funds. 

According to the quarterly average AUM data from the AMFI website, the AUM of thematic PSU funds has been on an uptrend continuously in FY24, as showcased in the image above. Furthermore, in Q4 of FY24, these funds’ AUM saw a significant jump in size. The Aditya Birla Life PSU Equity Fund has grabbed great attention from investors, as the average AUM of this fund recorded a significant growth of around 162 per cent quarter-on-quarter in Q4FY24. 

India PSE Index Trend 

As can be analysed from the above graph, the PSE index underwent a prolonged consolidation phase lasting around 5,540 days, which translates to over 15 years. India’s Nifty PSE index consists of public sector undertakings or public sector enterprises (PSE) that are publicly listed companies. In February 2023, the index broke out of this consolidation pattern and subsequently experienced an impressive rally of around 120 per cent, as depicted in the image above. We typically anticipate that when a trend remains sideways or consolidates for an extended period and then breaks out of this consolidation, the resulting trend is strong and likely to last for a long time compared to breakouts from shorter consolidation periods. 

PSU Performance and Trends
Over the past year, public sector undertakings have experienced significant growth, driven by several factors. First, there has been a turnaround in their operational performance, marked by enhanced efficiency across various segments. Particularly in sectors such as banking, the business environment has undergone significant improvement. Many PSU banks, between 2010 and 2020, and especially from 2016 to 2020, struggled with significant NPA issues. Now, effectively post 2021-22, with all of these asset quality problems being addressed, we are witnessing a robust turnaround across various ratios. Consequently, there has been a remarkable improvement seen across multiple performance metrics. 

During the downturn, these companies became attractively valued, drawing the attention of value investors who recognised the potential for turnaround. Despite this, some PSU banks still look attractive as per their valuation. Beyond PSU banks, there are other promising sectors to explore, such as railways, shipping, defence and power finance companies like REC and PFC. The defence sector, in particular, presents a long-term growth opportunity, fuelled by robust ‘Make in India’ initiatives and strategic imperatives. Companies like HAL, Mazgaon Dock and Bharat Dynamics exhibit high potential and boast substantial order books, albeit with occasional fluctuations. 

Factors to Consider before Investing in PSU Thematic Funds 

■ Understanding of Theme — Thematic PSU funds focus on investing in public sector undertakings across various sectors such as banking, infrastructure, defence, etc. It’s crucial to understand the theme of the fund and assess whether it aligns with your investment goals and risk tolerance
■ Investment Horizon — Thematic investing typically requires a long-term perspective to capture the potential growth opportunities within the chosen theme. A long-term commitment is essential, spanning at least 7-10 years, to capitalise on the potential growth and stability within the PSU sector.
■ Prudent Capital Allocation — Exercise caution in capital allocation, dedicating not more than 10 per cent of your overall portfolio to the PSU funds. This approach will help manage risk and maintain a balanced investment strategy.
■ Risk Profile — Assess the risk profile of the thematic PSU fund, considering factors such as sector-specific risks, concentration risk and liquidity risk. Understand the potential volatility and downside risk associated with investing in PSU stocks. Volatility tied to sector performance is a significant factor to consider when investing in thematic funds. Investors should be prepared for fluctuations in returns, which can be influenced by various factors impacting the specific sector or theme the fund focuses on. In the long term, you may need to experience all the phases of the market and volatility.
■ Government Intervention Impact — Stay attuned to government interventions, policies and initiatives as they significantly impact the sector in which the fund has invested. For example, the government initiatives promoting renewable energy may boost the performance of the renewable energy sector, benefiting thematic funds focused on this theme. Conversely, regulatory changes or budgetary decisions that adversely affect a particular sector, such as increased taxes or stricter regulations, can lead to underperformance of thematic funds invested in that sector. 

Conclusion
In conclusion, thematic PSU funds offer investors an opportunity to capitalise on the growth potential of public sector undertakings within specific themes. These funds concentrate on investing in PSU companies across various industries such as banking, infrastructure, defence, and more. By focusing on a specialised area or theme, thematic PSU funds provide investors with exposure to emerging opportunities and broader trends expected to shape the future economy. However, investing in thematic PSU funds requires careful consideration of several factors. Understanding the theme of the fund, assessing the risk profile, and having a long-term investment horizon are essential for success. 

Prudent capital allocation and staying attuned to government interventions, policies and initiatives are also crucial in navigating the volatility tied to sector performance. Despite the inherent risks and fluctuations in returns, thematic PSU funds have shown promising performance, as evidenced by historical data. Ultimately, investors should conduct thorough research, consult with financial advisors, and align their investment goals with the thematic PSU funds’ objectives to make informed investment decisions. By doing so, investors can potentially benefit from the growth opportunities presented by the public sector undertakings within specific themes or sectors while managing risks effectively

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