Sector funds: Tread with caution

Keep a small exposure and a longer investment horizon

When Sugandha Bose wanted to get into equities, she planned to invest Rs 70,000 in infrastructure funds as most were upbeat about the sector. Given the current infrastructure deficit in the country, the sector seemed to have huge growth potential.

However, Bose’s financial planner asked her to stay away from sector funds. This left her perplexed.

According to mutual fund rating agency Value Research, in the last one year, pharmaceutical sector funds have given almost 56 per cent returns, fast-moving consumer goods (FMCG) 50 per cent, banking 49 per cent and technology 38 per cent. At the same time, equity diversified funds have returned 30 per cent and the Sensex and Nifty have returned 17 and 18 per cent, respectively (as on August 13). Yet, experts advise retail investors to approach theme-based or sectoral investments carefully. “There are risks involved in a specific sector which an inexperienced investor will not understand. During the dotcom boom, many invested in the information technology sector. When the sector went bust, scores of them lost even their principal amounts,” says Abchlor Investment Advisors Managing Director, Abhinav Angirish.

Typically, sector funds tend to get concentrated. They are also affected by sector-specific news and government policies. For instance, railway-related companies’ stocks tend to jump right before the Railway Budget.

Risk profile
Bet on such funds only if you have a high risk appetite. While sector funds outperform the broader indices during good times, they fall as fast when markets head south. Birla SunLife Mutual Fund Head (Equity-Domestic Assets) Mahesh Patil says: “Sectors have a shelf-life — they perform only in a certain market cycle. One needs to understand the sector and know what cycle it is in.”

Financial planners say a person should invest only 10-15 per cent of his portfolio in such schemes. Another argument against excessive exposure: Fund managers are likely to run out of options over a period of time. So, only those investors with a sound investment portfolio should think of experimenting with sector funds.

Longer horizon
The retail investor should have a horizon of minimum two years to fetch decent returns. This is because sector funds can see very erratic movement in the short-term, say experts.

Sector selection
Many sector and thematic funds invest in more than just their core sectors. There are others in the infrastructure sector, like ICICI Pru Infrastructure and Tata Growing Economies Infrastructure Plan A-G, which invest in financial and services sectors, too.

Others like Reliance Power Diversified Funds, which is a power sector fund but behaves like an equity diversified fund, may make it difficult to differentiate it from a sector fund. In such a scenario, look at sectors where these schemes invest.

Investors also need to be aware about the thin demarcation between sectors and themes. “Infrastructure and lifestyle are themes, not sectors on their own. But banking, pharma and FMCG are sectors,” points out Wiseinvest Advisors CEO Hemant Rustagi.

A good way of investing in sector funds would be to opt for broader sectors, like healthcare instead of pharmaceuticals, or financial services in place of a banking sector fund alone.