Mutual funds provide you with a wide range of investment options, including opportunities to invest across the asset classes, market caps, sectors, and companies. While the mutual fund portfolio may be diversified based on the primary investment objective, the investors looking for having an investment exposure in a particular sector and theme may choose to invest in sectoral and thematic funds respectively. Even while they may be categorised under a single classification category of equity schemes, they differ slightly in terms of fundamental attributes of the scheme. This article will help you to know what is thematic fund and sectoral fund broadly and discusses the similarities and differences between such funds.
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Sectoral mutual funds refer to that category of mutual funds which aim to invest predominantly in the companies working in the specified sector. As per the SEBI categorisation principles, a sectoral fund must invest a minimum of 80% in equity instruments of the companies in that particular sector. For example, a pharma fund will provide you with a focused investment exposure in companies in the pharmaceutical industry. Thus, such funds are suitable when the investment outlook for that particular sector looks optimistic, as the fund manager will seek the investment opportunities with the confined universe of the companies in that sector only and hence, the investors may generate better returns from the expected uptrend thereon.
On the other hand, thematic mutual funds carry a broader vision in terms of the investible universe and hence, aim to invest predominantly in the companies impacted by a specified theme. In terms of the mandated investment exposure, the rules are similar to the sectoral funds and thematic funds need to invest a minimum of 80% in equity & equity related instruments of a particular theme. Examples of thematic funds are consumption funds focusing on the consumption theme, special opportunities funds focusing on companies involved in corporate actions like IPOs, buyback, mergers, demergers, etc.
Both sectoral, as well as thematic fund, allows the investor to have a focused and concentrated exposure into a particular sector/ theme and thus allows the investors to make the most of the investment opportunities available therein.
On the other hand, a thematic fund may be considered as a fund of related sectoral funds since an investment theme may cover a whole lot of sectors. As such, the scope and investment objective of a thematic fund is much larger than a sectoral fund. A sectoral fund will seek the correct forecast of the investment outlook for a particular sector for the investors to generate better returns, which may not be that easy to be predicted. Thus, considering the diversification of sectors within the theme, a thematic fund is a better investment option for beginner investors.
Taxation of Sectoral and Thematic Funds
With a minimum 80% equity exposure, sectoral and thematic funds enable your access to preferential tax rates for equity oriented schemes. As per the Income Tax Act, equity-oriented funds are those funds which invest 65% or more in equities and related securities. For the investments for less than 12 months, the gains are taxed as short-term capital gains at a tax rate of 15% (plus applicable surcharge and cess). However, for investments with a more extended period, the gains are taxed as long-term capital gains @ 10% (plus applicable surcharge and cess). As per the Income Tax laws, an exemption of up to Rs. 1 lakh is provided every year in respect of long term capital gains from equity shares and equity oriented mutual funds.
Tax Treatment for Equity Oriented Mutual Fund Schemes
The returns from mutual fund schemes are taxed as Capital Gains in the hands of investors. The gains from equity oriented mutual fund schemes are classified as short term capital gains if the investment in such funds has been for a period of less than 12 months. If the investment are held for more than 12 months, the gains will be taxed as long term capital gains. Short term capital gains are taxed at 15% (plus applicable cess and surcharge), whereas long term capital gains are tax at 10%. Further, long term capital gains from equities and equity oriented mutual fund schemes are exempt up to Rs. 1 lakh a year.
Disclaimers: The information set out above is included for general information purposes only and is not exhaustive and does not constitute legal or tax advice. In view of the individual nature of the tax consequences, each investor is advised to consult his or her or their own tax consultant with respect to specific tax implications arising out of their participation in the Scheme. Income Tax benefits to the mutual fund & to the unit holder is in accordance with the prevailing tax laws/finance bill 2017. Any action taken by you on the basis of the information contained herein is not intended as on offer or solicitation for the purchase and sales of any schemes of UTI mutual Fund. Please read the full details provided in SID and SIA carefully before taking any decision.
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