Thematic Mutual Funds for NRIs: Why and How to Invest in India

Are you looking to grow your wealth in India through sector-focused investment opportunities? Thematic mutual funds have delivered returns of 25.8% per annum over the last 5 years. These specialized funds attracted the highest inflows among all equity-oriented and hybrid new fund offers launched between January 2023 and March 2024.

Thematic funds have gained significant traction in recent years. Of the 161 sector and thematic funds available in India today, 64 were launched since 2020. A thematic fund is an open-ended equity scheme that invests based on predetermined investment themes. These themes capitalize on opportunities arising from macroeconomic trends, social changes, or technological innovations.

This approach allows you to invest in emerging trends while maintaining diversification across related sectors within your chosen theme.

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What Are Thematic Funds?

A thematic mutual fund is an investment vehicle that focuses on companies united by a specific idea or concept, rather than traditional classification methods like market capitalization or investment style.

When you invest in thematic funds, your money flows into companies across multiple sectors that align with a particular macroeconomic trend, innovation, or business concept. For example, a digital innovation thematic fund might include technology companies, e-commerce platforms, and fintech firms all connected by digital transformation.

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How Do Thematic Funds Work for NRIs?

Thematic funds follow a top-down investment approach. Fund managers first identify promising themes like renewable energy, artificial intelligence, or infrastructure development, then select sectors and companies that stand to benefit from these trends. This approach differs from diversified equity funds that typically use bottom-up stock selection methods.

Thematic funds offer broader diversification than sectoral funds. An infrastructure-themed fund might invest in cement, power, steel, and construction companies simultaneously. Similarly, an ESG-themed fund could include investments ranging from renewable energy producers to electric vehicle manufacturers.

SEBI classifies these as Sectoral/Thematic Funds, requiring that at least 80% of total assets be invested in the respective theme, with the remaining 20% allowed in other equity or debt instruments. This requirement ensures the fund stays true to its investment mandate.‍

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Key Benefits of Thematic Funds for NRIs

Thematic mutual funds offer specific advantages that make them suitable for NRIs looking to invest in India's growth story.

1. High Growth Potential: Thematic funds can deliver exceptional returns when you select the right themes. The HDFC Defense Fund generated a 77% return over the past year, while LIC MF Infra Fund and Bandhan Infrastructure Fund delivered 69% and 65% returns, respectively. These performance figures demonstrate the potential of well-timed thematic investments.
2. Strategic Diversification: Unlike sectoral funds that concentrate on a single industry, thematic funds spread investments across related sectors within your chosen theme. A manufacturing-themed fund might include stocks from the construction, chemicals, and engineering industries. This approach reduces the impact of poor performance in any single sector while maintaining focus on your investment theme.
3. Early Access to Emerging Trends: Thematic funds allow you to capitalize on emerging trends before they reach mainstream adoption. You can position your portfolio to benefit from evolving market dynamics and technological innovations that may take years to fully mature.
4. Flexible Risk Management: You can adjust your risk exposure within themes based on your comfort level. For an IT theme, you might choose established companies like TCS for lower risk or opt for mid-cap IT stocks for higher growth potential. This flexibility helps you tailor investments to your risk tolerance.
5. Portfolio Enhancement: Allocating 5-10% of your portfolio to sustainable long-term themes can create better returns over time. This strategic allocation maintains your core diversified approach while adding focused exposure to specific growth areas.‍

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How NRIs Can Invest in Thematic Funds in India

You need to follow a structured process to invest in Indian thematic mutual funds as an NRI. The regulatory requirements are straightforward once you understand the steps involved.

You must first open either a Non-Resident External (NRE) or Non-Resident Ordinary (NRO) account with an Indian bank. NRE accounts hold funds from foreign sources and offer full repatriation benefits, while NRO accounts contain income earned within India and have partial repatriation restrictions.

The Know Your Customer (KYC) process is mandatory for all NRI investments. You will need to provide:

• Passport copy with photo and address
• PAN card
• Overseas address proof (utility bill or driving license)
• Recent passport-size photograph
• Canceled cheque or Indian bank statement
• FATCA declaration

You can choose between a lump-sum investment or a Systematic Investment Plan (SIP) for regular monthly contributions. The choice depends on your investment capacity and financial goals.

Foreign Account Tax Compliance Act (FATCA) regulations restrict some AMCs from accepting US and Canadian NRI investments, though others may allow offline investments.

At iNRI, you can view eligible funds for investment based on your country of residence.

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Conclusion

Thematic mutual funds offer a focused way to participate in India’s sector-specific growth stories, allowing you to align your investments with key economic trends while still diversifying within related sectors. These funds are ideal if you have a higher risk appetite and strong conviction in specific macroeconomic themes, as they let you choose between established companies and promising mid-cap stocks within your chosen theme.

Allocating 5–10% of your portfolio to well-researched thematic funds can enhance your returns without overexposing you to a single sector. NRIs can invest by opening an NRE or NRO account, completing KYC, and using AMC websites, registrars like CAMS or Kfintech, or platforms such as MF Utility. If managing investments from abroad is difficult, you can appoint a Power of Attorney in India.

It’s always wise to consult a financial advisor if you have any doubts, as thematic funds tend to be more concentrated and volatile than broadly diversified funds.

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Frequently Asked Questions

Q1. What are the advantages of thematic mutual funds for NRI investors?

Thematic mutual funds offer NRIs exceptional growth potential, strategic diversification within chosen themes, opportunities to capitalize on emerging trends, and flexibility in risk management. They allow investors to align their investments with their knowledge and interests, potentially leading to better returns.

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Q2. How can NRIs invest in thematic mutual funds in India?

NRIs can invest in thematic mutual funds by opening an NRE or NRO account with an Indian bank, completing the KYC process, and then investing. They can choose between lump sum investments or systematic investment plans (SIPs).

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Q3. What is the recommended allocation for thematic funds in an NRI's portfolio? Financial experts suggest allocating 5-10% of your portfolio to well-researched, sustainable long-term thematic funds. This allocation can help create a high-powered portfolio over time while maintaining a core diversified approach.

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Q4. Are there any restrictions for NRIs investing in Indian thematic funds?

Some restrictions may apply, particularly for NRIs from certain countries. Due to FATCA regulations, some AMCs restrict US and Canadian NRIs, though others may permit offline investments. At iNRI, you can view eligible funds for investment based on your country of residence.

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Q5. What types of thematic funds are available for NRIs in India?

NRIs can choose from a variety of thematic funds in India, including dividend yield funds, PSU equity funds, MNC funds, energy funds, consumption funds, ESG funds, manufacturing funds, and quant funds, among others. Each offers unique exposure to specific economic trends and sectors.

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