Watch out for these sectoral funds in 2018

Mutual funds and especially equity funds have remained the darling of investors for the last couple of years. The data from SEBI for the month of December 2017 shows that equity and equity-related funds such as ELSS, equity ETFs, etc have added 15.4 lakh folios. Out of this, pure equity funds have added 12 lakh folios. One of the reasons equity funds have been found favour among investors is because of their higher returns. On average pure equity funds have generated a return of more than 14 per cent annually in the last three years and in last one year, it has given a return of more than 40 per cent.

While Banking, Infrastructure and FMCG were the strongest sectoral funds in 2017, we believe the start of the year 2018 gives a right opportunity for an investor to diversify into additional sectors, that have kept a low profile in terms of returns. A couple of sectors that may perform in 2018 is Pharma/Healthcare sector and Information Technology (IT) sector. In the last three years, they have grossly underperformed the larger market.

Improvement in fundamentals of these sectors is going to help them perform this year. Pharma sector has gone through a rough phase in the last couple of years due to compliance issue in their largest market, the US. Many big pharmaceutical companies have some large plants placed either under warning letter or import alert. This has impacted their financial performance. Even domestically, they have witnessed deterioration in their pricing. However, situation is likely to improve this year on both front. Even in IT, three years of underperformance has made the valuation of IT companies attractive. Besides, the improving growth environment globally augurs well for IT companies. Therefore, you can take exposure of these sector funds as they may add zing to your portfolio. Nevertheless, sectoral funds should not form more than 10 per cent of your portfolio.