Mutual funds are one of the most popular investment options in India. They allow common investors to grow their money without actively managing their investments. Among the different types of mutual funds, index funds and thematic passive schemes are gaining popularity. Both are passive investment options but work in different ways.
For a regular investor, choosing the right mutual fund is important for long-term financial growth. Should you invest in a simple index fund, or is a thematic passive scheme better? Let’s understand both in detail.
What is an Index Fund?
An index fund is a type of mutual fund that follows a specific stock market index, like the Nifty 50 or Sensex. These funds invest in all the stocks that make up the index, in the same proportion. Since an index fund does not involve active buying and selling of stocks, it is called a passive fund.
Key Features of Index Funds:
- Invests in all stocks of a particular index.
- No active stock selection by fund managers.
- Lower expense ratio compared to actively managed funds.
- Returns depend on the performance of the index.
- Less risk compared to sector-specific or thematic funds.
Example of Index Funds in India:
- HDFC Index Nifty 50 Fund (tracks Nifty 50)
- UTI Nifty 50 Index Fund (tracks Nifty 50)
- ICICI Prudential Sensex Index Fund (tracks Sensex)
What is a Thematic Passive Fund?
A thematic passive fund is also a type of passive mutual fund, but instead of following a broad market index, it invests in a specific theme or sector. These funds track an index that focuses on a particular theme, like technology, banking, healthcare, or ESG (Environmental, Social, and Governance).
Key Features of Thematic Passive Funds:
- Focuses on a specific theme or sector.
- Follows a pre-defined index related to the theme.
- Higher risk as it depends on the performance of a single sector.
- Potential for higher returns if the sector performs well.
- Suitable for investors with high-risk tolerance.
Example of Thematic Passive Funds in India:
- Nippon India Nifty Pharma ETF (tracks pharma sector)
- Mirae Asset NYSE FANG+ ETF (tracks US tech giants like Facebook, Apple, Netflix, Google)
- ICICI Prudential Nifty IT Index Fund (tracks IT sector)
Index Fund vs Thematic Passive Fund: Which is Better?
1. Investment Risk
- Index Funds: Lower risk as they spread investments across multiple sectors.
- Thematic Passive Funds: Higher risk as they focus on a single theme or sector.
2. Returns Potential
- Index Funds: Returns are steady and in line with the overall market growth.
- Thematic Passive Funds: Returns can be higher if the theme performs well but can also be lower in case of a downturn.
3. Diversification
- Index Funds: Well-diversified across different sectors.
- Thematic Passive Funds: Concentrated in one sector, leading to higher volatility.
4. Investment Horizon
- Index Funds: Ideal for long-term investors looking for steady growth.
- Thematic Passive Funds: Suitable for those who can take risks and want to bet on a specific sector.
5. Expense Ratio (Fees)
- Index Funds: Lower expense ratio (around 0.10% to 0.50%).
- Thematic Passive Funds: Slightly higher expense ratio (0.50% to 1%) due to the specialized investment approach.
6. Market Timing & Monitoring
- Index Funds: No need for market timing or active monitoring.
- Thematic Passive Funds: Requires some understanding of the sector and its performance trends.
Who Should Invest in Index Funds?
- Beginners in mutual fund investing.
- Investors looking for low-cost, low-risk investments.
- Those who prefer long-term stable growth.
- People who do not want to actively monitor the market.
Who Should Invest in Thematic Passive Funds?
- Investors who know specific sectors.
- Those who are comfortable with a higher risk for potentially higher returns.
- Investors looking to benefit from a booming sector.
- Those who already have a diversified portfolio and want to add focused investments.
By understanding the difference between index funds and thematic passive funds, investors can make an informed decision based on their financial goals and risk appetite.
