Know all about Thematic Investing Strengths and Its Risks

Over the few years, many financial innovations and inventions have taken place. Many new forms and variations of investments have been introduced to maximize investor's return. In the recent years, thematic investing is one such form of investment.

Thematic investing is the approach which takes advantage of the future trends. It is a top-down investment approach which helps the investors to gain exposure to the macroeconomic themes and trends through managed funds or baskets of related stocks. These baskets of stocks can be selected to represent any particular Equity index or can be in the form of exchange traded funds. The company can even take the benefit of index services to frame the most yielding thematic investment for their clients.

One of the challenges faced by thematic investment is identifying and capitalizing on themes successfully. Thus, not all investments will give you the best results. Thus, in thematic investment, the selection should be a basket of stocks rather than individual stocks. For this, they need to choose a trend or theme that aligns with their investment values. Once the theme is decided, investor should then trace them to a particular sector or region. These investments are selected based on companies which will benefit from long term structural trends.

The key benefit of thematic investment is to generate an alpha at scale where an alpha is a measure of fund's performance against a specified index. If alpha is positive 1 then the portfolio has outperformed the benchmark by 1% and a negative alpha indicates the opposite case. However, there are risks as well. Many are tempted by the increasing returns, but there are many companies part of the portfolio which are falling. Thus, if the investor moves to defensive position, investors are then trading on speculation. Thus to avoid investing in a fad, themes should be chosen according to their earnings potential, and whether the company is liquid.

Thematic investment is an alternative approach to traditional investments. However, before doing what the crowd is doing, it is important to understand the technicalities, strengths, and risks in order to get the best results. Thus, do your homework and keep investing!

Source : https://thematicinvestings.jimdo.com/2016/11/18/know-all-about-thematic-investing-strengths-and-its-risks/