Sectoral funds are suitable only for a small set of investors who have a fairly high degree of market knowledge and even for these investors, it is not advisable to have more than 10 per cent in sector funds. On the other hand, a well-diversified fund is more suitable for long term investors.
Various sectoral funds gave more than 100 per cent return in the last 1 year. However, should you invest in them now?
Suraj Shroff, Founder of Infiniti Investments, says, “Yes, various sector funds have given 100 per cent+ returns in the last 12 months from March 2020. While these returns look very attractive, we must not lose sight of the fact that the markets, in general, are up more than 90 per cent from the March 2020 lows of around 26,000 to almost 50,000 now. So invariably, there are many funds which have given amazing returns.”
Industry experts say each sector has its own performance, depending on the stage of the business cycle. Vivek Bajaj, Co-Founder StockEdge, says, “There are some sectors that could continue the outperformance vis-à-vis Nifty in future. So, it totally depends upon the structural cycle related to that sector. For instance, the real estate sector has given a long-term cycle change indication. It could continue for long after regular corrections. Hence, one should be more sector-specific when deciding to invest in such category of funds.”
V Vijayakumar, MD and CEO, Zebu Share and Wealth Management says, “Overall the market performed well during this period because of the continuous reduction in the interest rate, higher liquidity and of course strong fundamentals of Indian corporates.”
However, “to expect such returns going forward would be a big mistake that investors would make. Sectors such Technology, Commodities, Energy Infra and Pharma have all done well over the last 12 months. But given the current valuations and the rising likelihood of the 2nd wave of Corona, returns from here on are likely to be much lower,” adds Shroff.
What kind of investors should look at it?
Sector funds by nature are more aggressive as they have concentrated exposure to a single sector or theme. Equity funds in general perform well over the long term, 5-7 years and longer. According to experts sector funds are more suitable for seasoned investors, who can look to enter into beaten-down sectors or out of favour sectors and exit when they catch market attention. Shroff says, “Studies show that 9 out of 10 investors get this wrong and invest in a sector fund after it has given good returns. For example, Pharma and IT funds had a rough patch in 2017 and 2018, but investors did not want to invest in these themes, but now there has been significant inflows in these categories after a very strong performance. For that matter, you will also see AMC’s launching Sector funds mostly after a period of high returns.”
Experts say the market is ideal now to get invested, for investors with medium-term to long term horizon. Sector Funds should be looked at for at least 2 cycles i.e 8 to 10 years time frame. Bajaj says, “With Sector Funds the possibility that the return will be higher than benchmark index nifty/Sensex, only if hold on for a longer time frame.”
Prateek Mehta, Co-Founder and Chief Business Officer, Scripbox says “In addition, investors will need to have the ability, inclination and expertise to monitor the prospects closely. For a regular investor, this might be a lot of effort going into the optimisation of returns from a specific investment.”
Hence, experts suggest, sectoral funds are suitable only for a small set of investors who have a fairly high degree of market knowledge and even for these investors, it is not advisable to have more than 10 per cent in sector funds. On the other hand, a well-diversified fund is more suitable for long term investors.
What are some of the funds one could invest in for a shorter duration?
At the current juncture for shorter to medium-term investors liquid funds or balanced funds are highly suitable. Experts say these funds used to have high liquidity and well-managed returns compare with other investments.
Usually, equity is not suggested as it is not suitable for short term investments, but in case someone is keen on putting in a small portion of their portfolio into aggressive funds, experts say there could be opportunities in the PSU funds, Banking funds and Manufacturing theme funds over the next 3 years.
Bajaj says “One could also invest in Multicap funds which invest in all category of market cap companies. This will have higher return generation capability with controlled risk.”
On the other hand, Mehta says, “if the investment horizon is less than 5-7 years, it is best to invest in Fixed Income Funds. Investors can have a blended approach with a mix of Liquids, Ultra Short Duration and Low Duration Funds which have high-quality paper as the underlying instruments.”