Two years after we moved back to India from San Francisco, I made one of my smartest investment decisions.
I was at a coffee shop in Koramangala. My former SuperMoney colleague texted me about how well his US tech stocks were doing. I felt that familiar FOMO creeping in.
Then I remembered something. I was literally sitting in the middle of India’s tech capital. Bangalore was buzzing with startups. Infrastructure projects were everywhere. The pharma sector was booming post COVID.
Why was I missing out on these obvious trends happening right in front of me?
That evening, I discovered thematic mutual funds. They changed everything about how I invest in India.
💡 Reality Check: Thematic funds aren’t just about picking winners. They’re about investing in the India story you actually believe in.
In this article...
My Journey from US Stocks to Indian Themes 🌟
When I worked at Citrix in California, investing was simple. Buy some Apple. Add Microsoft. Throw in some Netflix. The US market had clear winners.
But India felt different when we moved back in 2017. The growth stories were everywhere but scattered across sectors.
My wife noticed it first. “Every time we drive to the airport, there’s a new flyover being built,” she said one day.
She was right. Infrastructure development was visible everywhere in Bangalore. New metro lines. Upgraded airports. Smart city projects.
But I was still thinking like a US investor. Individual stock picking. Broad market index funds. I was missing the bigger picture.
💡 Personal Discovery: The moment I realized I should invest in themes rather than just companies was when our US born son asked why Indian roads were getting better so fast. Out of the mouths of babes.
Thematic funds became my way to invest in these massive trends without trying to pick individual winners.
Understanding Thematic Funds the Simple Way
Thematic mutual funds are like investing in a story rather than just a company. They focus on big trends that could reshape entire sectors over the next decade.
Unlike sector funds that invest only in one industry, thematic funds can pick stocks from multiple sectors. All connected by a common theme.
For example, an infrastructure thematic fund might include cement companies, steel makers, road builders, and even banks that finance these projects.
The fund manager becomes your trend spotter. They identify companies positioned to benefit from major economic or social changes happening in India.
SEBI requires at least 80% of the fund to stick to the theme. The remaining 20% gives managers flexibility for defensive plays or cash management.
💡 Learning Moment: I spent weeks confused about the difference between sector and thematic funds. Then my Druva days taught me the difference. Sector funds are like focusing only on storage companies. Thematic funds would include storage, backup, cloud, and security companies all under the “data protection” theme.
The beauty is professional management combined with focused investing. You get the upside of concentrated bets without the stress of picking individual stocks.
Why Thematic Funds Make Sense for NRIs 🎯
Living abroad gives us a unique perspective on India’s growth potential. We see things that local investors might take for granted.
The Distance Advantage
When you live outside India, certain trends become obvious. Digital payments explosion. Healthcare infrastructure growth. Manufacturing becoming competitive globally.
These aren’t just local stories. They’re part of India becoming a global economic powerhouse.
Currency and Repatriation Benefits
Thematic funds are equity oriented. This means favorable long term capital gains treatment. Just 12.5% tax on gains above Rs 1.25 lakh annually.
For NRIs with NRE accounts, both principal and gains are fully repatriable. No bureaucratic hassles.
Professional Theme Selection
Fund managers spend months researching macroeconomic trends. They have access to company managements. Sector experts. Government policy makers.
We get this expertise without having to become India research analysts ourselves.
| Investment Approach | Individual Stocks | Thematic Funds |
|---|---|---|
| Research Required | Very High | Moderate |
| Diversification | Low | High |
| Professional Management | None | Expert Level |
💡 Strategic Insight: After working at multiple US startups, I learned that timing and theme matter more than perfect execution. Thematic funds let us bet on the right timing and themes while leaving execution to experts.
Top Performing Themes That Actually Work 📈
Based on three years of investing and tracking performance, here are the themes that have delivered for NRI investors.
Infrastructure and Manufacturing
This has been the star performer. Government capex of Rs 11.1 lakh crore in 2024. Private sector finally joining the party.
Infrastructure funds delivered average returns of 45.17% in 2023. Manufacturing funds led collections in 2024 with 56% of thematic fund inflows.
Healthcare and Pharmaceuticals
Indian pharma recovered strongly with 34.65% average returns in 2023. Post COVID, healthcare infrastructure investment accelerated.
Market size expected to reach $130 billion by 2030 from $50 billion in 2023. That’s a massive growth trajectory.
Defense and PSU
PSU funds delivered 59.22% returns in 2023. Defense sector modernization created long term opportunities.
Government focus on self reliance in defense manufacturing opened up new growth avenues.
| Theme Category | 2023 Returns | 5 Year CAGR |
|---|---|---|
| PSU Funds | 59.22% | 26.51% |
| Infrastructure | 45.17% | 35.56% |
| Pharmaceuticals | 34.65% | 40.36% |
💡 Performance Insight: I learned this from my HappyFox days. Sometimes boring themes like infrastructure outperform sexy themes like technology. Focus on fundamentals, not headlines.
Technology Funds After underperforming in 2022, tech funds bounced back in 2023. AI adoption and digital transformation continued driving growth.
My Thematic Investment Strategy 💰
After trial and error with multiple approaches, I’ve settled on a strategy that works for our family’s goals and risk tolerance.
Core Satellite Approach
70% of my thematic allocation goes into proven themes. Infrastructure, healthcare, and manufacturing form the core.
30% goes into newer themes or cyclical plays. Defense, energy transition, and consumption themes get smaller allocations.
Timing Based on Policy Cycles
I increased infrastructure allocation after the 2019 elections when capex focus became clear. Added pharma during COVID uncertainty.
Government policy shifts create multi year investment cycles. Thematic funds help capture these systematically.
SIP Plus Opportunistic Lump Sum
Monthly SIPs in core themes provide rupee cost averaging. Lump sum investments during market corrections in cyclical themes.
This combination smooths volatility while allowing us to capitalize on temporary dislocations.
💡 Implementation Strategy: I review thematic allocations every six months. Not to chase performance but to ensure the underlying themes still make sense. Policy changes can make themes irrelevant quickly.
Geographic Diversification
Thematic funds provide India specific exposure. This complements our US retirement accounts and international investments.
Selecting the Right Thematic Funds 🔍
Choosing good thematic funds requires looking beyond recent performance. Here’s my systematic approach developed over three years.
Theme Sustainability Analysis
Ask whether the theme will matter in 10 years. Infrastructure development isn’t going away. AI adoption is accelerating.
But some themes are cyclical. PSU performance depends on government priorities. Commodity themes depend on global cycles.
Fund Manager Track Record
Look for managers who’ve navigated full market cycles. How did they perform during the 2020 crash? The 2018 correction?
Experience in both bull and bear markets matters more than recent outperformance.
Portfolio Construction Approach
Good thematic funds balance concentrated bets with risk management. Check how many stocks they hold. What’s the largest position size?
Too concentrated means high volatility. Too diversified defeats the purpose of thematic investing.
| Selection Criteria | Ideal Range | Red Flags |
|---|---|---|
| Portfolio Stocks | 30 to 60 | Below 20 or Above 100 |
| Largest Position | 5% to 8% | Above 10% |
| Fund Size | Rs 500 to 5000 cr | Below Rs 100 cr |
💡 Selection Tip: I prefer funds with 3+ year track records managed by the same team. New fund offers in thematic space are usually launched at market peaks.
Expense Ratio Considerations
Thematic funds typically have higher expense ratios than diversified funds. But don’t chase the lowest fees if it means compromising on management quality.
Common Mistakes I’ve Made and Learned From 🚫
Three years of thematic investing taught me several expensive lessons. Let me save you from repeating my errors.
Chasing Last Year’s Winners
I bought a defense fund in early 2024 after seeing 2023 returns. Bought near the peak. Had to wait months to break even.
Successful thematic investing requires entering before trends become obvious to everyone.
Overallocating to Themes
Initially, I put 40% of my equity portfolio in thematic funds. During the 2022 downturn, this created excessive volatility.
Financial advisors recommend 5% to 10% maximum allocation to thematic funds. I’ve settled on 15% but with careful diversification.
Ignoring Valuation Cycles
PSU stocks were trading at historical highs when I increased allocation in 2023. Should have waited for better entry points.
Even good themes can become expensive. Patience often beats FOMO.
Not Having Exit Strategy
I held an infrastructure fund for two years without defining success metrics. Theme was right but execution was poor.
💡 Mistake Management: I now set simple rules. If a thematic fund underperforms its benchmark by 5% for two consecutive years, I exit. Themes can be right but fund managers can be wrong.
Building Your Thematic Portfolio Step by Step 📋
Starting thematic investing doesn’t require complex strategies. Begin simple and evolve based on experience and learning.
Starter Approach (Rs 2 to 3 Lakh)
Pick one broad theme you understand well. Infrastructure or healthcare are good starting points.
Start with monthly SIPs of Rs 5,000 to Rs 10,000. Learn how thematic funds behave before expanding.
Intermediate Strategy (Rs 5 to 10 Lakh)
Add a second theme that’s different from your first. If you started with infrastructure, consider healthcare or technology.
This provides diversification while maintaining thematic focus.
Advanced Portfolio (Rs 10+ Lakh)
Include 3 to 4 themes with different cycles. Core themes (infrastructure, healthcare) plus satellite themes (defense, energy).
Consider international thematic funds for global exposure.
| Portfolio Level | Theme Count | Allocation Strategy |
|---|---|---|
| Starter | 1 Theme | 100% SIP based |
| Intermediate | 2 Themes | 70% core, 30% satellite |
| Advanced | 3 to 4 Themes | Goal based allocation |
💡 Building Tip: I started with just Nippon India Power & Infrastructure Fund. Added ICICI Prudential Pharma Fund after six months. Built complexity gradually as I gained confidence.
Rebalancing Frequency
Review allocations every six months. Markets move in cycles. Themes that outperform for two years often underperform for the next two.
Tax Efficiency and NRI Compliance
Understanding tax implications helps maximize after tax returns while staying compliant with regulations in both countries.
India Tax Treatment
Thematic funds are equity oriented. Short term capital gains (less than 1 year) taxed at 20%. Long term gains at 12.5% above Rs 1.25 lakh exemption.
TDS rates for NRIs are 20% for short term and 12.5% for long term gains. File ITR to claim refunds if applicable.
DTAA Benefits
Double Taxation Avoidance Agreements can reduce effective tax rates. UAE residents get 10% rate. Singapore residents often get 5% to 10%.
Submit Tax Residency Certificate to fund houses for lower TDS deduction.
FATCA and CRS Compliance
US and Canadian NRIs face restrictions with some fund houses. Check eligibility before investing.
Some AMCs allow offline investments even if online platforms restrict access.
💡 Tax Planning: I always choose growth option over dividend option in thematic funds. Better control over tax timing plus higher compounding potential.
Documentation Requirements
Keep detailed records of all transactions. Date of purchase, NAV, units bought. This helps with tax calculations and LTCG computation.
Future of Thematic Investing in India 🔮
Several trends will shape the thematic fund landscape for NRI investors over the next five years.
New Theme Categories
Energy transition, water management, and digital infrastructure themes are emerging. ESG focused thematic funds gaining popularity.
Climate change adaptation and sustainability themes will become mainstream investment categories.
Technology Integration
AI driven fund management and automated rebalancing will improve thematic fund performance while reducing costs.
Better data analytics will help fund managers identify themes earlier in their development cycles.
Regulatory Evolution
SEBI continues refining regulations to protect investors while encouraging innovation. Expect more standardization in theme definitions.
International thematic funds may become more accessible for NRI investors seeking global exposure.
💡 Future Strategy: I’m gradually increasing allocation to emerging themes like energy transition and digital infrastructure. These could be the next decade’s outperformers.
Conclusion: Your Thematic Investment Journey Starts Now 🎯
Thematic mutual funds transformed how I think about investing in India. They let me bet on trends I believe in without becoming a full time stock researcher.
The key lessons? Start simple. Understand the themes you invest in. Don’t chase performance. Maintain reasonable allocation limits.
India offers incredible thematic opportunities for NRI investors. Infrastructure development, healthcare expansion, manufacturing growth, and technology adoption are multi decade trends.
Professional fund management combined with our outside perspective on India’s potential creates a compelling investment approach.
Thematic funds won’t make you rich overnight. But they can provide exposure to India’s long term growth story in a systematic, professional manner.
💡 Final Wisdom: Thematic investing taught me that being right about the big picture matters more than perfect timing. Focus on sustainable themes rather than hot trends.
Frequently Asked Questions 🤔
Q1: How much should NRIs allocate to thematic funds?
Financial advisors recommend 5% to 10% maximum. I personally use 15% but with careful diversification across themes and careful risk management.
Q2: Should NRIs choose new fund offers in thematic categories?
Generally avoid NFOs. Most are launched during market peaks when excitement is high. Prefer established funds with track records during different market cycles.
Q3: How do thematic funds perform during market crashes?
They typically fall more than diversified funds due to concentration risk. But recovery can be faster if the underlying theme remains strong.
Q4: Can US based NRIs invest in all thematic funds?
Some restrictions exist due to FATCA compliance. Check with fund houses. Many allow offline investments even if online platforms are restricted.
Q5: When should NRIs exit thematic fund investments?
Set clear criteria upfront. I exit if a fund underperforms its benchmark by 5% for two consecutive years or if the underlying theme becomes irrelevant.
Sources and References
- GoINRI Thematic Mutual Funds Guide
- Business Today Sectoral Funds Growth Analysis
- SBNRI Best Mutual Funds for NRI 2024
- 5Paisa Sectoral Thematic Funds
- Bajaj Finserv Thematic Mutual Funds
- Smallcase Best Sectoral Mutual Funds
- Scripbox Sectoral Thematic Guide
- Business Standard Manufacturing Infrastructure Performance
- Wright Research Top Thematic Funds
- Angel One Sectoral Thematic Funds
