Mutual Funds: Should You Invest in Sectoral Funds?

Despite the volatility in the stock market, retail investors are betting on sectoral and thematic funds. In April, the funds reported new inflows of Rs 3,843 crore, the highest among nine types of pure equity mutual fund schemes, according to data from the Association of Mutual Funds in India. Even passive schemes are gaining ground as they have seen net inflows of Rs 15,887 crore per month, equivalent to net inflows of about Rs 15,890 crore in equity funds.

Sectoral Fund: See before jumping

Sector funds always carry a high risk because they bet on the performance of a single sector as opposed to equity diversified funds. These funds are cyclical which can go through multiple cycles of ups and downs In the past, many sectors have done well many times and the same sectors were affected when the situation changed. Since investing takes extra risk to generate additional returns, it is important to know the risk factors along with the possibility of return. Returns from sectoral funds may be higher in the short term as most themes go through a cycle. However, these funds lack consistency in the long run.

Harshad Chetanwala, co-founder of MyWealthGrowth.com, says sectoral or thematic funds are more risky because they invest in a theme or sector and their portfolio can be highly concentrated. “The key to investing in sectoral funds is the sector and its good visibility. Historically, many investors have invested in sectoral funds just by looking at their returns and this is not the best approach, ”he said.

Ideally, Chetanwala says investing in equity diversified funds works better for investors as they rely on professional fund managers to decide sector allocations and invest accordingly without investing in sectoral or thematic funds. “The volatility in sectoral funds can be much higher than in equity diversified. You should build your core portfolio with diversified funds and then if you have a surplus to take extra risk, you can see 5-10% of the allocation in this type of fund depending on your risk appetite, ”he said.

Brijesh Damodaran, managing partner of Belvedere Associates LLP, says investors are looking at options other than the existing plain vanilla. “Returns from sectoral funds depend on economic cycles and entry points. Investing in an infrastructure theme in 2019 will provide a negative return. However, if the same investment is made in 2020, it will now give a double-digit return, ”he said. An investment strategy should be based on basic needs and strategic needs and sectoral / thematic allocation should be a strategic call and overall investment strategy should be formulated accordingly.

Experts say investors are seeing short-term performance of some sectoral funds, such as infrastructure and technology, which have returned between 17 and 28% for one to three years. While some sectors, such as infrastructure and infrastructure, have the potential to improve and steam the economic recovery, investors must be wary of geopolitical tensions, rising inflation and uncertainty arising from rising interest rates.

Passive funds for diversification

Passively managed funds continue to attract significant investors. In fact, only one index fund was launched per month which earned about Rs 91 crore and most of the investment came in the existing fund. Himanshu Srivastava, Associate Director – Managing Research, Morningstar India, says, “In recent times, passively managed funds have gained prominence among investors who have started adding these funds to their portfolios from a variety of perspectives.”

Since January this year, asset management companies have raised Rs 7,939 crore in 50 new schemes in passive funds, including index funds, overseas investor funds and gold ETFs. Of this, Rs 7,239 crore has been raised through 32 new index funds, indicating that investors are opting for index funds due to market volatility. Index funds are ideal for those investors who are looking for predictable returns. These funds do not require extensive tracking and returns reflect the index.