Sector & thematic funds: Prospects, not past returns, should be your guide
By Vivek Banka

Sector and thematic funds attracted Rs 46,137 crore in 2023-24, the largest inflow across all fund categories, according to data from the Association of Mutual Funds in India (Amfi). Many of these funds have delivered hefty returns over the past year: PSU (public-sector unit) funds averaged 89.9 per cent, infrastructure funds 63.6 per cent, and pharma-ceutical funds 51.1 per cent.

High and quick returns  

The primary advantage of these funds is their potential to deliver high returns quickly. “An investor who can accurately select the right sector/theme and time their entry and exit well can earn disproportionately high returns,” says Vivek Banka, co-founder, GOALTELLER.

Steep downturns possible  

These are highly volatile funds. “The sectors/themes favoured by the market can change without warning. For instance, the power sector was buoyant in 2007 but declined steeply in 2008,” says Banka. Anticipating these changes is difficult.

The drawdowns can be severe. “A sector that falls out of favour may remain so for a prolonged period,” says Banka.

Can you handle drawdowns?  

These funds demand high risk appetite. “Only investors who can handle a 20-25 per cent or higher downturn should consider them,” says Banka. They are best suited for experienced investors who can assess which sectors or themes are likely to outperform or those with access to an advisor.Investors working within a sector, who have insights about its prospects, may also invest. Investors with a low risk appetite, including novices choosing their first fund, should steer clear.

Mean reversion is inevitable  

Keep these funds in the satellite portfolio. Banka says exposure to a particular sector/theme should not exceed 5 per cent of the equity portfolio, while exposure to all sectors and themes cumulatively should not exceed 20 per cent. Gang suggests taking exposure to sectors and themes through a mix of active and passive funds. “In case of very large sectors or themes, where it is difficult to predict which segment will do well, a passive exposure may work better,” she says. She also favours passive exposure in the case of sectors where the top 9-10 stocks account for 85-90 per cent of the market cap.  When selecting a sector or theme, avoid going by past performance. “Reversion to mean inevitably happens,” says Banka.

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