Yet, restrict your exposure, as these are also high on risk.
Investors in sector-specific mutual fund schemes have reasons to be happy. Most schemes have consistently outperformed the benchmark indices – the Bombay Stock Exchange’s Sensex and the National Stock Exchange’s Nifty.
An analysis of category average returns over five years shows that sector funds, especially pharma, banking and FMCG (fast moving consumer goods), have outperformed diversified funds and also the benchmark indices. Over the past five years, banking and pharma funds have provided average annual returns in excess of 20 per cent, significantly higher than most other instruments. In the past three years, the category average returns of pharma funds has been around 17 per cent. FMCG and banking funds have provided returns of 15 and 11 per cent, respectively. The Sensex or Nifty, in the same time period, has given only single-digit returns.
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Industry experts said as the economy grew at a rapid clip, some sectors recorded phenomenal growth. Their stocks, therefore, were able to outperform the overall market. In addition, both pharma and FMCG are defensive sectors. As a result, during the lean phase in 2008-09, they were able to provide stable returns.
So, with the economy continuing to do well, does it make sense to have a high exposure to sector funds? “One should definitely look at sector funds as an investment opportunity,” says Hemant Rustagi, CEO of Wiseinvest Advisors. However, the advice comes with some caveats. Some of these sectors tend to perform exceedingly well, but in phases; sometimes, the rate of growth stagnates or even falls sharply.
Take the technology sector. Its high growth rate was hampered for a couple of years and, during this phase, these schemes did not do well. “Sector-specific funds tend to be cyclical and if there’s any change in the critical parameters that govern the sector, they underperform. By this virtue, they can be risky,” explains Kartik Jhaveri, a certified financial planner. Another example is banking funds. In short phases, the interest rate scenario could have a say in the way banks perform.
According to data from Value Research, a Delhi-based mutual fund research agency, pharma schemes have been an exception. They have performed consistently over a five-year time period. “Typically, pharma is a defensive sector and will have investor interest even when the market corrects. Moreover, it also has steady fundamental growth. So, one can expect some consistency,” Jhaveri added.
While devising a sector-specific fund strategy, Rustagi cautions new investors from going overboard. “Start off with diversified funds and , when the risk appetite, expertise and portfolio size increases, look at sector funds,” he said. Besides the safer ones, like FMCG and pharma, if you wish to look at other sectors, there has to be some analysis. Certain retail, energy and infrastructure-related funds have not performed that well.
“Timing is of the essence in case of sector funds,” says a wealth manager with a leading international bank. Picking up a sector-specific fund at a time when its shares are attracting rich valuations could be a risky proposition.
If one gets stuck with a bad sector, even a systematic investment plan (SIP) or averaging would not help recoup losses over the long run. On the other hand, SIP and averaging techniques, when applied to diversified funds, even at the peak of a market, can give decent returns over a longer period of time. Jhaveri feels, over the long term, the difference between the returns of diversified funds and sector-specific funds may not be very large. Over the five-year period, the pharma sector and the banking sector have generated an average annual return of around 20-25 per cent. Diversified funds are close behind at 20 per cent.
But, don’t go the whole hog, advised experts. A four-five per cent increase in returns is not worth the risk. To cash in on this opportunity, allocate 15-20 per cent of the mutual fund portfolio to sector-specific funds. Also, have exposure to three to four separate sector funds, like banking, pharma and FMCG, so that the element of diversification also comes in.
