I hold sector funds: Should I exit?

Recently, someone mailed in asking, "I have SIPs (systematic investment plans) in equity mutual funds. Should I continue in them?"

After confirming that the time horizon was indeed long term, we thought the obvious answer would be a YES. But when we looked at the details of the mail, we found that the SIPs were in sector funds, like power sector and infrastructure. Soon, the answer was not that easy. Sector funds work only if the sector is promising enough in the long term. And a lot of those who invested into sector funds during the bull run, did so, probably on the advice of an agent, without as much knowing about the risks.

You need mettle to handle sector funds as they are riskier than your regular diversified equity funds. So, what does it take to invest in them?

What then, would be a fitting reply to this email? We explore:

Investing in sector funds

Sector funds are better used by professional investors who track sectors closely. All funds are set to do well in certain market cycles. So, you need to follow trends and get out at relevant points in time.

Moreover, an average retail investor is not likely to have the time to watch the portfolio closely. So, it is best to move into a set of diversified equity mutual funds.

Selecting a sector

You should buy sector funds based on macro economic factors or if the Government policy favors a particular sector. The following points will come handy:

1. You need to invest time whilst picking a sector fund

2. Stick to matured sectors and not sunrise sectors; matured sectors are those which are likely to face lower impact at various market cycles, eg, FMCG.

3. Restrict sector exposure to less than 10 per cent

4. Watch out for exit opportunities to avoid steep downturn in the portfolio.

At this point, when markets look volatile, it is best to adopt a defensive strategy and look at sectors which will not be adversely affected by the demand lull that we will see in the short-term.

Which sectors should I add to my portfolio?

FMCG: This is one sector that looks promising given the current volatility; demand has slowly started picking. This is one of the first sectors which will see results. This sector has a defensive approach, as it is most likely that FMCG will continue to do moderately well even during trying times, since they are vital part of daily consumption.

Pharma: A relatively defensive sector. However, they are not viewed as the most consistent sector, since they are likely to be impacted by various intrinsic factors such as patents/raw material cost, etc .

Power: This sector looks promising with Government launching a slew of projects. Given the substantial increase in the Government spending in this segment, the sector looks promising as long as the fund is invested in fundamentally well-to-do companies within this sector. Remember, it is good to hold from a medium term perspective.

However, buy these sectors with a medium-term perspective. Defensive sectors are likely to under-perform when markets enter into a bull phase. Hence, you need to exit at appropriate points.

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Choosing a sector requires understanding of the market dynamics. For example: The weakening US dollar was a booster to the IT sector and it saw a brief rally.

Infrastructure sector: After a serious dent in demand within this sector, it has finally started looking up with raw material costs coming down and various stimulants injected into the economy.

The sector looks positive within a medium–long term perspective. However, in the intermediate period there could be glitches since the realty market cycle is inherently long and an immediate turnaround may not happen. Short-term investor or a novice investor should avoid this sector.

Hold or Exit?

If you are already holding a sector fund, or have an SIP, evaluate the growth prospect from a medium to long-term perspective and decide on whether to hold or let go. If some of the sectors that you hold do not look promising in the medium-term; exit and move into a defensive set of funds.

The current market rally may just be a bear market rally and does not necessarily indicate economic turnaround. So, adopt a defensive strategy to protect downside; these funds are also likely to see the fastest turnaround when the economy stabilises.

If you are unsure of picking sectors or are not really skilled at this, it maybe a good idea to exit sector funds and move into diversified equity funds as well.

What do YOU do with your money? Where do YOU invest? Share your story with us. Mail us at [email protected] mentioning your name, age, profession and the city you reside in. We would love to hear from you!

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