Mutual Fund Investment – Should You Invest In Sector Mutual Fund

Should You Invest In Sector Mutual Fund???

Is it right time to invest in sector mutual fund?

If you are investor in mutual funds, I believe you will be interested to know that should you invest in sector mutual fund or not? Or, you want to know whether or not you should invest in sector mutual fund schemes via SIP ? Or simply if you are lured by the extraordinary returns earned by some of the sector mutual funds in last year, it is important for you to know some things before you make a decision.

It is true that in last one year period, the infrastructure and banking sector mutual funds have given decent returns. And, in fact, some of them have outperformed the broader market as well. But it is worth noting that normal investors are not advised to invest in sector mutual fund or sectoral fund. It is a natural question that if any fund has given returns to the tune of 35-40% annually, what is the problem in betting on it? Financial planners do not advise to invest in sector mutual fund due to high level of risk and uncertainty associated with it.

To invest in sector mutual fund is riskier?

In all types and categories of mutual funds, to invest in sector mutual fund is considered to be riskiest. To understand the logic behind it, let’s consider the performance of a few funds who are the best performers in their respective sectors. First of all we would go through the numbers of those two sectors who have outperformed the broader market in last one year. These two sectors are infrastructure and banking. (See below tables)

 

Best Performing Sector Mutual Fund 

(Infrastructure) (annual return in %)

                                                   1 year     3 year     5 year

IDFC Infrastructure Fund             40.42      17.98      14.51

L&T Infrastructure Fund             32.18      19.63      21.50 

Source- Value Research 

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Best Performing Sector Mutual Fund 

(Banking) (annual return in %)

                                                   1 year     3 year     5 year

Reliance Banking Fund               32.32      20.02     21.75

ICICI Pru Banking Fund              32.30      24.43     26.27

Source- Value Research 

 

Note:- In this article, whichever fund schemes are we discussing, those are regular plans and have been in the market for at least 5 years. If you decide to invest in direct plans of mutual fund you may get 1-2% more return from the same scheme of same fund house. 

 

No guarantee of fixed return in mutual fund 

Though there is no guarantee of fixed return in any mutual fund, but this is more true for sector mutual funds. The reason is that it is not easy to predict the performance of sector companies. So it is necessary for you to take informed decision if you have decided to invest in sector mutual fund. If you take into account the performance of infrastructure funds, you will find that last one year has been phenomenal for them but same is not true for their performance in last 3 or 5 years period.

The story of banking sector is no different from infrastructure sector. In fact, a big drawback of sector mutual fund is its dependency on the companies working only in that particular sector. And the performance of respective companies depend not merely on their management policies but the changes in geo-political situations, macro economic environment and government policies.

If any sector is facing the pressure of these changes, you should try not to invest in sector mutual fund. The reason behind this is that the sectoral funds related with it will perform poorly. In case of diversified equity fund, at least this risk is mitigated as the fund manager of diversified fund have the option to switch from poor performing sector to good performing sector companies. In case of sector mutual fund, the fund manage is bound to follow the mandate of the fund scheme. Therefore it is necessary for him to remain invested in those companies only which are working in that particular sector. That’s the reason you will find major difference in yearly return of various sector mutual funds. (See below tables)

 

Best Performing Sector Mutual Fund 

(Pharma) (annual return in %)

                                                       1 year     3 year     5 year

Reliance Pharma Fund                   -13.72      5.15       14.18

UTI Pharma & Healthcare Fund     -14.33       2.98       12.53

Source- Value Research 

————————————————–

Best Performing Sector Mutual Fund 

(Technology) (annual return in %)

                                                                       1 year     3 year     5 year

Aditya Birla Sunlife New Millennium Fund      4.24      6.17       15.78

Franklin India Technology Fund                        3.32      4.94       14.03

Source- Value Research 

 

The sector funds mentioned above are from two sectors- Pharma and Technology. If you watch the data closely, you will notice that in last year pharma sector funds have given negative return. And in technology funds the returns are much less than the those of broader markets. Though the five year returns of both these sectors are almost 15% CAGR but similar return you can get from any good diversified mutual fund scheme. So, there is no question of having more risk by investing in sector mutual funds.

 

Are all sector mutual funds risky?

If you want consistency in the performance of sector mutual fund, only one sector fits your bill and that is FMCG. (See table below)

Best Performing Sector Mutual Fund 

(FMCG) (annual return in %)

                                                                       1 year     3 year     5 year

SBI FMCG Fund                                              16.55       16.70     18.32  

ICICI Pru FMCG Fund                                     14.56      15.90     16.36

Source- Value Research 

The return of the FMCG mutual funds scheme has been consistent in 1 year, 3 years or 5 years period and it hovers around 15-18% CAGR. From this point of view, only this sector looks less risky and is worthy of having space in your portfolio. And why not, when FMCG is counted as the evergreen sector in share markets.

So should one invest in sector mutual fund or not?

If you are an informed investor, understand the various aspects of economy and share market and not averse to risks, you must invest in sector mutual fund as it may give an edge to your portfolio. For example, if you believe that now pharma sector is going to revive and in coming days it may earn handsome for you, the pharma funds can become your bet. If you are not willing to invest lump sum, you may go via SIP route but not for a very long duration. Normally SIP of 6 months to 12 months are considered sufficient to invest in sector mutual fund. Though you would have to watch closely the changing market conditions and news related with your sector companies. It is necessary as it may provide you the exit route at appropriate time.

 

So, in a nutshell, if you are going to invest in sector mutual fund, follow the following rules:-

  1. Be careful while selecting fund scheme. Always go with good track record and reasonable fund size.
  2. Do not allocate more than 10-15% of your portfolio to invest in sector mutual fund.
  3. Do not get lured by past returns only, follow the market trends as well.
  4. Watch your investment and review it regularly, do not show greed while selling.
  5. Be ready to exit from your investment at appropriate time.

 

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