With the stock markets having been range bound for some time now, sector funds have beaten equity-diversified funds and benchmark indices by a huge margin. Certain defensive sectors such as pharmaceuticals and fast-moving consumer goods (FMCG) have outperformed by a large margin. No wonder Agra-based Manu Jain is confused.
Graphic designer Jain had invested in a banking sector fund two years before and got phenomenal returns (two-year returns = 48.04 per cent). But in the last couple of months, banking stocks have been under pressure. On the other hand, pharmaceutical and FMCG sectors continue to be strong. “I can’t decide if I should increase my investment in sector funds and include defensive sectors as well, or buy more bank stocks as the outlook is very positive,” he says.
According to mutual fund tracking agency, Value Research, FMCG sector funds have returned slightly over 30 per cent in the last one year, as on January 14, 2011. Similarly, the pharmaceutical sector returned over 28 per cent, technology 15 per cent and banking 20 per cent. In the same period, equity-diversified funds returned only seven per cent due to exposure to midcap stocks, even lower than the Sensex and Nifty’s seven per cent each.
Typically, an investor’s allocation is purely a function of his/her risk-taking ability. But financial planners are averse to sector funds because of their narrow definition. Concentration of risk, therefore, becomes a major issue. In good times, sector funds outperform broader indices. But in a falling market, they fall equally fast in bad times. “Active fund managers are optimistic about consumption-based sectors such as FMCG, but I think investors should tread within limits,” says Nitin Rakesh, chairman and managing director, Motilal Oswal Asset Management Company.
| PICK AND CHOOSE | ||||
| Returns (%)* | ||||
| 6-mth | 1-year | 3-year | 5-year | |
| FMCG Funds | 6.91 | 30.11 | 12.46 | 15.33 |
| Pharma Funds | 7.70 | 28.16 | 20.68 | 16.16 |
| Technology Funds | 13.69 | 15.36 | 3.99 | 11.86 |
| Banking Funds | 4.03 | 20.44 | 1.07 | 21.13 |
| Equity Diversified | 3.30 | 7.00 | -3.30 | 14.27 |
| Sensex | 5.14 | 7.25 | -3.10 | 15.01 |
| Nifty | 4.98 | 7.50 | -3.06 | 14.68 |
| *Returns as on January 14, 2011 Source: Value Research | ||||
The trick lies in being able to change your preference with time, explain experts, as sectors have a short cycle. “The common strategy of buying and holding may backfire in case of sector funds,” says Hemant Rustagi of Wiseinvest Advisors. For instance, pharma funds have performed exceedingly well in the last one year because of which the sector’s three-year returns look impressive.
For the likes of Jain, “Instead of increasing your allocation towards sector funds, rotate the same money among different sectors,” advises Rakesh. Reason: Diversification is the best way to beat cyclical risks involved with any sector. And, it also saves you the anxiety of tracking and changing between sectors regularly. At present, fund managers are betting on banking, automobiles, FMCG and the domestic pharmaceutical space.
The other way is to check your total exposure to a sector. According to Sanjay Sinha, CEO, L&T Mutual Fund, as banking has around 22 per cent weight in the Sensex, a similar exposure to banking stocks would be enough for a retail investor’s portfolio.
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Say, you have an equity exposure of Rs 1 lakh, of which Rs 90,000 is in an equity-diversified fund and the rest in a sector fund (banking). If the equity-diversified fund has a 10 per cent exposure to banking stocks, your total exposure to banking (20 per cent) is almost the same as the sector’s weight in the Sensex and you need not increase it further. Those holding more than one equity diversified fund may not even need a sector fund in many cases as most diversified funds have decent exposure to banking.
However, choose your sectors carefully. Rustagi feels there may not be enough headroom left for an investor to enter some of these funds now. But there could be exceptions as well. For instance, the banking sector has already slipped 15 per cent in the last three months. So, there could be an opportunity to enter a scheme that focuses on this sector. Others such as pharma and FMCG are defensive sectors. Therefore, a bad market situation may actually see these sectors do better. But, take a call depending on your risk profile.
