But it requires risk appetite, macro understanding and, therefore, timing.
In turbulent times, equity may sound like a bad idea, but most fund managers believe this is perhaps the best time to enter the market with sectoral plays. With the markets having got no respite from bad news since February – India’s increasingly weak macro economic data, crises in West Asia and Japan, etc – it’s best to look at defensive sectors or themes.
Interestingly, some sectoral indices seem to be witnessing a positive trend, even in these conditions. This week, the interest rate-sensitive real estate, banking and consumer durables’ stocks gained the most, whereas fast-moving consumer goods (FMCG), oil & gas and metals underperformed the market. In a situation like this, fund managers suggest investors look at specific sectoral funds, especially those that have underperformed the market over the long term.
| SECTOR-WISE RETURNS (In percentage) | |||||
| Sector | 1-mth | 3-mth | 1-year | 2-year | 3-year |
| Banking | -2.08 | -5.81 | 22.14 | 67.25 | 14.69 |
| Pharma | -3.33 | -9.38 | 14.30 | 63.00 | 23.36 |
| FMCG | 2.57 | -3.96 | 21.90 | 48.90 | 18.16 |
| Gold Funds | 2.01 | 0.97 | 24.81 | 15.07 | 15.49 |
| Infrastructure | -2.84 | -13.02 | -7.25 | 36.42 | -2.63 |
| International | -2.69 | -1.64 | 12.80 | 30.16 | 2.15 |
| Technology | -2.70 | -5.79 | 8.94 | 65.75 | 10.61 |
Says Sankaran Naren, chief investment officer of ICICI Prudential, “Investors mostly get into sectoral funds when a sector is either hyped or has delivered good returns. But that is not the time to invest. Instead, they should look at specific sectors which have underperformed, like the infrastructure sector has for the last few years.”
Infrastructure is the only fund that has given negative returns (minus 2.63 per cent) over three years, compared to the double-digit returns from most other sectoral funds like FMCG, pharma, information technology, gold and banking. Banks are sensitive to macro economic circumstances, which is why they fall much more than the broader market during a bearish patch. With inflation touching new highs and taming the fiscal deficit target looking tough, fund managers believe this is the best time to invest in the banking sector.
Despite inflation, the banking sector is hedged against industrial delinquencies, say fund managers. India is a growing economy and for that, supplies have to be increased, whether of food products or automobiles. This requires capacity expansion and funding. Says Arun Khurana, fund manager at UTI Mutual Fund, “Over the next two or three years, the banking sector has the potential to return 100 per cent returns to investors.”
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TIMING
While fund managers advise against timing the market, when it comes to sectoral or thematic funds, it does matter. ICICI Pru’s Naren cites the example of the global crisis in 2008, when banking stocks fell far more than the broader market. However, investors who entered banking as a category two years ago have earned 67.25 per cent returns over this time. In comparison, the banking sector has returned 14.68 per cent to those who invested three years ago. Clearly, timing and understanding the macro economic prospects of a sector matters. Those who entered the funds during the lowest phase (two years ago) have maximized returns compared to any diversified fund or sectoral fund. Banking, pharma and FMCG as categories have given substantial returns to investors over two years, but not as much as banking (see table).
Gopal Agrawal, deputy CIO and head of equities at Mirae Asset Management, says: “Sectoral funds are for investors who can take higher risks. The time when investors enter the fund is also critical for returns, as is the understanding of the macro economics of that particular sector.”
In the current situation, fund managers are bullish on the fortunes of infrastructure, banking, FMCG and power, as most of these have been beaten down in recent times. Once the headwinds cease to hit these sectors, the turnaround would earn good returns. But fund managers say these funds are for those who can stay invested for long and have a higher risk appetite.