Thematic Investing
Thematic investing is a portfolio construction approach that organises equity allocations around structural, multi-sector trends — such as digitalisation, clean energy, or India's manufacturing renaissance — rather than traditional sector or geographic classifications, with smallcase baskets on NSE and thematic mutual funds on AMFI platforms serving as the primary access mechanisms in the Indian retail market.
The rise of thematic investing in India was closely linked to the proliferation of smallcase portfolios — curated baskets of listed stocks built around specific investment themes that investors could track and replicate through their broking accounts. Platforms such as smallcase (operated by Smallcase Technologies) partnered with brokers including Zerodha, HDFC Securities, and Axis Direct to offer investors access to pre-built thematic baskets covering ideas like rural India consumption, green energy, defence, fintech, and pharma. By 2024, over 400 smallcase portfolios were available, with a significant portion being theme-based rather than factor-based or sector-based.
Thematic mutual funds, regulated under SEBI's 2017 categorisation framework, operated as open-ended schemes with the flexibility to invest across sectors if the investments aligned with the stated theme. The SEBI regulation required that at least 80% of assets be deployed in stocks consistent with the theme. AMFI data showed that thematic/sectoral funds were among the fastest-growing categories in the domestic mutual fund industry, with assets under management (AUM) growing sharply from FY2020 onwards as retail investor flows into equity mutual funds surged.
The analytical challenge in thematic investing was identifying themes that had genuine multi-year structural duration versus those that were cyclical re-labellings of conventional sector bets. A defence-themed fund that predominantly held PSU defence companies was, at its core, a cyclical bet on government capital expenditure and budget allocation — durable over a policy cycle but subject to revision. In contrast, a digital payments theme that held companies across banking, fintech infrastructure, and consumer internet captured a structural technology adoption shift with lower policy dependency.
India-specific thematic narratives that attracted significant institutional and retail interest between 2020 and 2025 included: the China plus one manufacturing shift benefiting Indian specialty chemicals, electronics, and pharmaceuticals; the energy transition theme covering renewables, green hydrogen, and electric mobility; the domestic defence and aerospace indigenisation push under Atmanirbhar Bharat; the data centre and cloud infrastructure build-out supporting digital economy growth; and the financial inclusion theme encompassing microfinance, small finance banks, and payment companies serving underbanked populations.
The risk profile of thematic investing differed from broad market investing in important ways. By construction, thematic portfolios concentrated in companies exposed to a specific trend, reducing diversification. When the theme underperformed — either because the structural narrative was overestimated, the timeline was longer than expected, or a competing theme attracted capital flows — the concentration produced sharper drawdowns than a broadly diversified portfolio would have experienced. The 2021-2022 period saw certain technology and new-age themes globally (and in India) experience sharp re-ratings downward as interest rates rose, illustrating the risk of theme-versus-reality misalignment at high valuations.
For investors comparing thematic products, the key evaluation dimensions were: the quality of the underlying theme rationale (structural versus cyclical), the valuation at which the portfolio was assembled (entry price discipline), the number of genuinely theme-aligned constituents (versus padding with tangentially related names), the rebalancing framework (how the portfolio evolved as the theme matured), and the cost structure (expense ratios for mutual funds, transaction costs for smallcase rebalancing).