From infrastructure to consumer goods, and aviation to information technology – an array of sectors strike a chord with investors at different times. As a result, mutual fund houses end up investing large sums into specific themes or sectoral funds from time to time.
In this financial year alone, a sum of ₹23,000 crore has been invested in thematic funds alone. But wealth advisors advise that investing in one particular sector in a hope that this sector will reap high returns, is not a wise thing to do.
“Investing behind themes sounds cool, but is rarely a great advice. Infrastructure was seen as a secular trend in 2007 but 15 years have passed now and Nifty infra index has given a return of 1 percent CAGR only vis-a-vis Nifty's 9.4 percent during this time,” said Sandeep Jethwani, Co-founder of Dezerv.in.
For the unversed, a sector fund is a mutual fund that invests in one type of industry or sector, for instance, IT finance, industrial, infrastructure, PSU, ESG and FMCG. Investing in sectoral funds leads to a concentrated risk, and is suitable to high risk-taking investors only.
Cycle of growth
Wealth advisors suggest that each sector undergoes its own economic cycle, and if one ends up entering a sector at the wrong time, one is bound to incur heavy losses.
“When a sector or theme is undergoing a bad cycle, investors tend to lose patience, and redeem their investment. During that time, these funds don’t get focus from fund managers also. However, it's exciting to invest in a theme which is trending, the returns are barely worth the risk, instead one should build a well-diversified portfolio that invests in different sectors and industries,” adds Jethwani.
Since markets move in cycles, today's bull market may be the bear market of tomorrow. The IT sector is a case in point that rose significantly last year but took a beating this year.
“We saw last year the IT pack being the major gainers. However this year, they took a beating and it was the neglected value stocks that took the baton. For an investor, investing in a particular sector means getting exposed to a sector which may or may not perform, thus, their whole portfolio might underperform. Therefore it is important that we have a well diversified portfolio so that this cyclicity is removed. An aggressive investor can have around 20 percent of their portfolio in sectoral funds, however, since timing of markets becomes a necessity, it shouldn't form the core portfolio,” Abhishek Dev, Co-Founder and CEO of Epsilon Money Mart.
Also, these funds carry concentrated risk – which is antithetical to creating a diversified portfolio.
“Sectoral funds always carry a higher risk because they bet on the performance of a single sector or a theme unlike diversified equity mutual funds which invest in all types of sectors to mitigate the concentrated risk. So as far as goal-based investments are concerned I do not recommend investing in sectoral funds as these funds are cyclical that can go through multiple cycles of ups and downs and they lack consistency over the long term,” said Preeti Zende, a Sebi-registered investment advisor and founder of Apana Dhan Financial Services.
And if you still want to invest in some sectoral funds, you can stick to a few sectors only by investing the excess money. “Once you get comfortable with investing, you can start with all-time favourite banking sector, IT sector, Auto, Capital Goods and Consumables. But it is better to invest your excess money into the sectorial funds after you invest for your goal-based investments,” adds Zende.