Sectoral funds have become popular due to their potential for delivering higher returns, especially during bull markets. But investors must keep in mind that these funds are not for short-term bets and they should invest in them through systematic investment plans (SIP) with a five- to seven-year horizon.
In February, out of Rs 26,866 crore net inflows in equity-oriented funds, sectoral funds reported net inflows of Rs 11,263 crore. Of this, asset management companies raised Rs 7,178 crore from five new funds. Interestingly, sectoral funds have reported the lowest redemption percentage as compared with other equity-related funds in the month, indicating a more stable investor sentiment.
The sectors showing promise for sustained growth and higher returns are those aligned with the capital expenditure cycle and the government initiatives on infrastructure spending. Sectors such as auto
Nirav Karkera, head, Research, Fisdom, says the appeal of sectoral funds lies in their ability to capitalise on specific themes that are expected to outperform the broader market. “In bull markets, investors often seek opportunities to enhance their returns by focusing on sectors with strong growth prospects or favour-able market conditions,” he says.
Satellite portfolio
Sectoral thematic funds should be considered as part of the satellite portfolio rather than the core allocation. A satellite portfolio consists of tactical plays such as investing in specific themes. So, investing in these funds can be beneficial for those seeking to diversify their investments and generate alpha.
Abhishek Banerjee, founder & CEO, Lotusdew Wealth & Investment Advisors, says if an investor particularly likes a fund and wants to enhance exposure to a certain sector, then the sector fund can be used as satellite allocation. “Investing in broad funds and adding a tactical allocation towards a sector of their choice is usually preferred,” he says.
Sector funds are more risky than broad-based funds and can be very very volatile, especially in the short-term. Investors, thus should also have a pretty high conviction in a particular sector. “While sectoral thematic funds can provide opportunities for higher returns, they also come with increased risk due to their focused exposure,” says Banerjee.
What to keep in mind
Investors must keep in mind that investing in an oversold sector might present an opportunity, but investing in an overbought sector could lead to losses. Certain sectors such as banking and IT are highly cyclical, requiring investors to carefully time their entry and exit points. A skilled and experienced fund manager can play a crucial role in navigating the entry and exit of the sector and identifying investment opportunities.
Soumya Sarkar, co-founder, Wealth Redefine, says investors need to assess the long-term outlook. Emerging sectors like AI and electric vehicles
Sectoral funds tend to be more volatile than diversified funds due to their concentrated exposure to a single sector. “Investors should look for consistency in performance over various market cycles and assess the experience and track record of the fund manager managing the sectoral fund,” says Karkera.
Long-term bets
Typically, sectoral funds entail high risks and necessitate a long-term perspective, as returns may fluctuate or take time to materialise. “Individuals venturing into sectoral funds should maintain a long investment horizon of five to seven years to earn higher returns,” says Sarkar.
Fund houses currently have a positive outlook on themes such as manufacturing, infrastructure and banking. The pharmaceutical sector, which has undergone consolidation, is likely to see growth in the future.
