Strategies to invest in sector funds
Banking sector dedicated funds are one of the worst performers recently. On average, these funds have generated a negative return of 29 per cent year to date, worst in the equity category. Recent underperformance has made it one of the worst performers in the last three and five year period.
|
Category
|
YTD
|
1 Month
|
1 Year
|
3 Years
|
5 Years
|
|
Thematic-PSU
|
-10.9
|
3.34
|
-0.21
|
-6.58
|
0.77
|
|
Sectoral-Banking
|
-29.27
|
-1.53
|
-18.29
|
-5.11
|
1.99
|
|
Sectoral-Infrastructure
|
-6.37
|
7.75
|
1.33
|
-3.08
|
2.81
|
|
Small-Cap
|
6.35
|
13.75
|
17.35
|
-0.28
|
6.03
|
|
Value-Oriented
|
-3.29
|
5.51
|
5.81
|
0.68
|
5.5
|
|
Thematic-Energy
|
3.75
|
8.32
|
21.44
|
1.59
|
11.66
|
|
Thematic-Dividend Yield
|
2.28
|
6.37
|
11.56
|
2.19
|
6.04
|
|
Mid-Cap
|
3.38
|
9.63
|
15.66
|
2.62
|
6.26
|
|
Large & Mid-Cap
|
-2.8
|
5.86
|
9.06
|
2.74
|
6.63
|
|
ELSS
|
-3.51
|
4.61
|
7.54
|
2.96
|
6.18
|
|
Thematic
|
1.06
|
5.96
|
10.66
|
2.97
|
5.62
|
|
Multi-Cap
|
-3.68
|
4.19
|
7.81
|
3.65
|
6.43
|
|
Large-Cap
|
-4.86
|
2.79
|
5.5
|
5.23
|
6.72
|
|
Thematic-Consumption
|
0.92
|
5.9
|
13.35
|
5.25
|
8.38
|
|
Thematic-MNC
|
4.19
|
5.9
|
15
|
6.03
|
5.43
|
|
Sectoral-Pharma
|
46.9
|
15.34
|
61.7
|
17.93
|
4.6
|
|
Sectoral-Technology
|
19.7
|
6.91
|
21.99
|
21.83
|
11.14
|
This is not unusual in the stock market. Business goes through various cycles as it expands, slows down, and declines. We have witnessed this earlier happening in the Indian stock market and elsewhere. For example, between 2003 and 2017, the infrastructure sector was the best sector that created wealth for its investors, but it is lagging now in terms of performance.
Sector funds in India
Sector funds in India are those funds that invest a minimum of 80 per cent of its total assets in equity as well as in equity-related instruments of a particular sector. Currently, there are four major sectoral funds available in India, viz. banking, infrastructure, information technology, and pharmaceutical.
Sector investment strategies mean finding the best sector to invest in the forthcoming year. Investing in sector funds can generate better returns if you could identify the future winners among the sectoral funds. They can add immensely to your portfolio returns if you can identify the next winner.
Identifying the next winner
Nonetheless, the problem is identifying the sector that is going to perform next year. Here are a couple of ways in which you can identify the sectors that can generate superior returns next year. This can be done with the help of the overall weightage of foreign institutional investors (FIIs) and domestic institutional investors (DIIs) in different stocks. Currently, one can see that pharmaceutical and IT are the two sectors where institutional investors are increasing their stake and hence, can be one of the winning sectors.
Strategy
In addition to this, you can also apply a simple strategy of ‘revision to mean’. This means investing in sectoral funds that have been laggard in the last few years may turn out to be the best performer this year. Hence, once you identify the worst-performing sector of this year, invest in that sector at the beginning of the next year. This strategy historically has generated better returns.
Investing in sector funds, however, can be a risky proposition as the portfolio is very much concentrated. These funds invest in companies belonging to that particular sector only and are, therefore, more volatile than other sectors. Hence, a sector fund should never be your core fund which you hold for the long-term. It can be a part of your satellite fund, where you do the tactical allocation. Moreover, it should never constitute more than 10 per cent of your total portfolio.