Criteria, caution when investing in sector MFs

Past performance of a mutual fund scheme is no indicator of its future performance. However, investors continue to chase historical returns, especially when it comes to sectoral or thematic funds. “Taking decisions based on historical returns is one of the biggest mistakes investors make. Anyone who wants to get into a sector now, because it has generated fabulous in the last three years, should ask themselves why they did not invest in that sector three years ago,” says Arun Kumar, Head of Research, FundsIndia.To cash in on this return chasing mindset of investors, mutual funds also launch new funds in sectors or themes that seem to be the most fancied by investors at the time. Think infra schemes in 2007 and tech schemes in 2000. For instance, investor interest in global technological giants like Facebook, Amazon, Apple, Netflix and Google (popularly known as Faang)is at its peak. It is no surprise that Mirae Asset has launched its NYSE FANG+ ETF FoF recently.Should investors get into the sectoral or thematic space just because several AMCs are coming out with new fund offers (NFOs)? No, experts say. “Fund houses usually launch sector-specific schemes during bull runs or when that sector is heated. By coming out with NFOs when historical returns are high, fund houses are milking investors’ greed,” says Tanwir Alam, Founder & CEO of Fincart. For example, people who were lured by historical returns and invested in NFOs of infotech schemes in 2000 lost heavily when the dotcom bubble burst.The dotcom bubble burst hit those who invested in 2000Sector and thematic funds carry high risk and are useful only for investors who can time them. 82655815Source: ACE MF; Compiled by ETIG DatabaseWhen to investIdeally investors should invest in sector or thematic funds that are ‘expected to do well in future’ and not the ones that ‘did well’ in the past. “Instead of chasing sectors based on historical returns, investors should focus on sectors which are not doing well now and could turn around in reasonable time,” says Alam.Is there any sector worth betting on now based on the above criteria? Yes and auto is one of them. With vehicle registration at a eight-year low, the auto sector had a really bad 2020-21. The second wave has also dashed hopes of a speedy recovery. However, this is an opportunity for investors who want to bet on its ultimate recovery There will be lot of pent up demand once the market finally opens up and therefore, auto sector is a good place for investors who want to invest now and are ready to wait it out. Despite the jump in the past three-four months, shares of public sector enterprises are still at very low levels and therefore, this can be another segment long-term investors can consider.What about sectors that are doing well now? Tech companies are benefitting now because the pandemic is forcing people to work from home. Though IT companies are expected to do well, their valuations capture most of this. “Most IT stocks are quoting at 2-3 times from their 52-week lows and getting in at such heated levels may create problem for investors. Margin pressure is also expected in IT sector due to the ongoing wage inflation there,” says Alam.Pharma sector falls in the third category, where the price has gone up because it has benefitted from the pandemic, but still has upside potential. “We are in the middle of a pandemic and we need pharma even after the pandemic. Its valuation looks expensive if you compare with five-year average because valuations were depressed in between,” says Rajat Sharma, CEO, Sana Securities. People are postponing treatment for other non critical illness now and this will come back as pent up demand in coming years.Pharma has benefitted a lot from the pandemicDespite recent rally, some steam is still left in pharma sector due to the second wave. 82655824Note: Sorted on the basis of 1-year returns; Only schemes that have completed a year included in the table. Source: Value ResearchWho should investFinally, a word of caution. Sector and thematic schemes are useful only for evolved investors who have knowledge about an industry and also have the ability to time its entry and exit. If you think you don’t have that ability, you should invest in a plain diversified fund and leave that decision to the fund managers. Investors also need to restrict their exposure to such exotic products. “Even if you think you are sophisticated enough to do the timing, put the 80% core portion into diversified funds and use only 20% for sector and thematic funds,” says Tarun Birani, Founder & CEO, TBNG Capital Advisers.

from Economic Times https://ift.tt/3tWO586