NRIs in UAE: Pros and cons of investing in sectoral and thematic funds

Question: My family members and I have been investing in mutual funds. Many wealth managers are advising us to invest in sectoral and thematic funds. Can you please throw some light on what these funds are?

ANSWER: Sectoral and thematic funds are equity mutual funds that follow a specific investment strategy. Sectoral funds invest primarily in companies belonging to a sector of the economy or a specific industry such as banks, cement, chemicals, pharmaceuticals, etc. Thematic mutual funds invest in companies across sectors that are related to a common theme such as public sector companies’ fund. Sectoral and thematic funds are considered to be risky since they invest in only one sector and, if such sector faces a major downturn, the entire fund suffers substantial losses. Further, such funds face regulatory risks where changes in policy can wipe out a sector’s prospects. There is also a risk of technological disruption where a new technology can adversely affect the existing industry. 

To earn a reasonable return in sectoral funds, investors need to be advised on the time for entry and exit depending on the performance of the sector during the relevant period.  Most investors are attracted to sectoral funds which have reached the peak of the cycle and suffer losses when the sector slows down and the mutual fund units are sold at a lower price. Most investment analysts advise that not more than 10 to 15 per cent of the portfolio should be allocated to sectoral and thematic funds and investors should be prepared to stay invested for at least five years.

Question: While NRIs are remitting more funds to India in view of the stronger dollar/dirham, some of us are concerned about the rupee weakening further. What is the cause for this decline and will it continue for long?

ANSWER: There are several factors which are responsible for the rupee weakening against the US dollar though it has remained relatively stable against other currencies. An important reason for the rupee weakening against the dollar is that foreign portfolio investors have in the past few weeks sold Indian equities and bonds in order to remit dollars which are invested in high interest yielding bonds of their country. Between January and November this year, around $17.8 billion have been pulled out of India on account of selling of Indian securities. Indian companies and Government agencies have also repaid US dollar denominated loans and debts and this has led to increase in the demand for dollars in India.  Further, merchandise imports have outpaced exports by a fairly wide margin, partly on account of Indian industry increasing capital expenditure in India, resulting in import of capital goods. 

The increase in trade deficit has to some extent been offset by robust services exports and rise in inward remittances. The Reserve Bank of India has allowed the rupee to find its own level based on market forces and has only intervened to control volatility on account of speculative pressures. It is expected that in the coming months export of Indian merchandise will register a healthy increase on account of several free trade agreements which have been signed and are about to be signed. The effect of these agreements will be felt within the next three to six months as exports of goods and services from India increase pursuant to these agreements. Foreign direct investment flows into India are also expected to rise especially in the tech sector.

Question: If I recall correctly, the data protection legislation was passed sometime back.  Is it now applicable with sufficient safeguards to protect the interest of the public at large and children in particular?

ANSWER: The Digital Personal Data Protection Act was passed by Parliament in 2023 but will come into force in a graded manner from May 13, 2027. The DPDP Rules 2025 have been announced last month. The rules prescribe safeguards such as encryption, masking and access controls to prevent personal data breaches. Specific timelines are laid down for data retention and erasure, requiring data fiduciaries to wipe out personal data after specified periods unless the retention is mandated by law. The retention applies to data which may be relevant for national security, legal compliance and statutory disclosure requirements. The three-year data retention requirement for e-commerce, online gaming and social media continues to apply.

Under the DPDP Act, data fiduciaries are prohibited from tracking or behaviourally monitoring children or directing at them advertising material. This is subject to certain exceptions which permit tracking to determine a child’s real time location to ensure their safety, security or protection. The law permits tracking or monitoring to ensure that no information, service or advertisement is likely to harm a child’s wellbeing. Data fiduciaries will face heavy penalties in the event of any failure to report or plug breaches of personal data. Given the rapid pace of India’s digitisation, its powerful digital public infrastructure and the rapid adoption of new technologies such as artificial intelligence, this law will give India an enforceable data governance framework to address privacy concerns.

The writer is a practising lawyer, specialising in corporate and fiscal laws of India.