Picking the right sector funds

FMCG and pharma funds have given solid returns and look set to do well in future

Over very long periods, stocks have indubitably outpaced debt and fixed-income investment. Though if you have not made the correct investments — in the right stocks or sectors — chances are your gains are hardly likely to beat the average fixed-income investor, if at all.

Two of the best-known methods of investing in the stock market are to purchase quality stocks such as through an equity-diversified fund, or to passively invest in index funds that tend to do well since they merely track the broader market (and the general indices).

There is a third strategy that often does even better. That is investing in sectors that are all set to grow—and therefore do well. If you pick the growth sectors, your gains can beat the broader market by a wide margin. Over a five-year period, pharma and FMCG funds have come up with the best returns of all the 24 categories of funds, including large-cap funds, gold funds, gilt funds or tax-planning funds according to data by Value Research Online.

In the past five years, FMCG and pharma funds have topped the charts and delivered 29 and 20 per cent returns, respectively. Ditto for periods of three months (29 and 15 per cent returns, respectively) and of six months (21 and 14 per cent returns, respectively). By and large, however, all funds in these sectors did extremely well. In the past five years, the worst performer of all FMCG and pharma funds still returned a sound 17 per cent, almost thrice as much as the BSE Sensex's meagre 6.3 per cent.

In fact, no other sectors have consistently ranked in the top three. In the coming years, these sectors are more than likely to deliver market-beating returns.

Experts reckon that, because of a good monsoon, FMCG stocks do rather well in rural markets. Also, in a slowing economy, people do not purchase big-ticket items but tend to spend more on discretionary products such as FMCG. By now, however, stocks in these sectors have run up quite a good bit.  

On the other hand, the pharma sector is poised for roaring growth in coming years. The depreciation of the rupee is expected to boost its revenue and profitability. These stocks, moreover, are still available at reasonable valuations—and could be picked up profitably.

In the coming year, these sectors look promising. Says Hemant Rustagi, CEO, Wiseinvest Advisors: “Yes, these funds have been doing well and they could continue to do well given that there has been a good monsoon and pharma could benefit from the rupee.”

However, experts caution that one should not over-allocate to sector funds. Investing heavily in only a few sectors increases the concentration in and risk to your portfolio. Besides, sectors usually tend to be either on the top-rung or bottom rung, which means they come with higher risk. Says Rustagi: “I wouldn't recommend sector funds to investors who are just starting out and building their portfolio. But investors who already have a sound portfolio should look at these funds.”

Therefore, invest only some of you money in either of these sectors. Start with smaller allocations to such funds, i.e. around 5-10 per cent only if you already have a well-diversified portfolio in place. Accumulate more units when these sectors correct. Chances are, these funds could add the zing to your portfolio.