In a rapidly growing Indian economy, there is a considerable degree of confidence that equity investment in India has a strong chance of yielding positive returns. Coincidentally, the chance is high that a bet is safe and profitable, and more importantly, a large rally is highly expected. Hence, it is assumed that an investment made even in a broad basket of stocks could yield a healthy return. For example, Nifty50, the main indices, a constantly updated barometer of stocks from various sectors, demonstrated a 5-year CAGR of 13.5%, which is in line with the broadest stocks in the Nifty500 index of 14.7%. To put it succinctly, understanding the dynamics of the market and identifying a selection of thematic stocks or sectors is expected to result in significant superior performance compared to the general market. At the same time, Realty provided 25.3%, Capitals 21.4%, and Midcaps 19.4% CAGR.
Thematic investing is a compelling strategy for a seasoned investor. The essence of this approach lies in identifying and understanding the current imperative needs, specifically focusing on key areas of economic and industrial advancement. A prime example is the global imperative to address climate damage and restoration. Countries worldwide are formulating policies and supporting domestic industries to meet this critical demand. Being the key demand of the whole world, the gaps between demand and supply are vast. As for raw material resources, capital goods and institutions to generate and purchase renewable energy. Despite the mismatch, it is a central investment criterion with high inflows is a focal area of development over the next 2-3 decades, leading to overvaluation due to lack of opportunity. That’s why companies and areas focused on the area do well. But based on their size and revenue outlook, many may not be a reasonable investment option.
Cusp must observe new developments taking place in the economy, industry and company, for which extensive research and analysis can help identify topics with long-term potential. Thematic investing, which deepens specific trends, underscores the importance of diversification. This strategic approach helps mitigate risks associated with individual stocks, which can lose traction over the long term and often carry high valuations. Constant revision and restructuring of the basket is required, with profit and loss in between. Themes often take time to develop, and short-term market fluctuations can affect the theme more highly in high beta stocks.
While thematic investing offers the potential for high returns, it also comes with inherent risks. If the risk appetite is low and the investment horizon is short, investors should use effective risk management strategies such as hedging, diversification, investing only in large companies, avoiding medium and small caps, investing only in low beta stocks, and even setting a stop loss. limits Understanding the risk-return profile, objective, timing and risk involved in the issue is crucial to matching investments with an individual’s risk tolerance.
As India continues to undergo transformative changes across various sectors, thematic investing provides a unique avenue for investors to align their portfolios with the country’s growth story. By embracing these strategies, investors can navigate the complexities of the market and position themselves for success in the ever-evolving landscape of India as a thematic growth model.
Thematic investing involves building portfolios based on macroeconomic and industry themes as well as general cyclical trends based on market sentiment. Understanding the pulse of the stock market is the key here.
In the Indian context, topics can range from the rapid digitization of the economy (JanDhan, GST, Adhar (government services), UPI, Datacentre), high infrastructure & government handled, developing as a manufacturing hub, and sustainable practices to renewable energy as a future source of energy
In manufacturing, it includes sectors that will replace and increase new exports, including electrical to engineering goods. A sector that has already risen in the last 10 years is Pharmaceuticals and Chemicals, which is expected to maintain its advance with a slowdown in China. Companies directly and indirectly advancing to the accompaniment of Solar, Wind, Biofuel, hydrogen fuel, electronic vehicles, technology and massive global production lines are upcoming areas in India. Otherwise, new generation companies are also rapidly developing due to India’s large domestic economy such as e-commerce, Fintech, Foodtech, Edtech and various types of products and services in progress to old economy.
The author, Vinod Nair, is Head of Research at Geojit Financial Services.
Disclaimer: The opinions and recommendations made above are those of individual analysts or trading companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
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Updated: 26 Nov 2023, 13:27 IST
(tagsTo Translate)Nifty50