Should mutual fund investors bet on sector funds for higher returns in the current market?

This post was originally published on this site asks mutual fund advisors and financial planners every week for a list of frequently asked queries by their clients. This week we spoke to Subir Jha, Founder, BuckSpeak, a wealth management firm, based out of Hyderabad, to understand what retail mutual fund investors should do about sectoral investments.

Questions asked by investors:

  1. Should we invest in sectoral funds to earn higher returns?
  2. Should we book profits and bet on banking sector funds or infrastructure funds since they are moving up?
  3. Are tech or banking ETFs safer than regular funds?

His response to the investors:
Big part of the ‘higher’ returns in sectoral funds are a function of ‘timing’ them well. We all know how difficult it is, to time the market. Let’s take an example of returns,over different time periods, in a Pharma fund:

Pharma fund* Nifty*
Jan 2014-Oct 2015 85 % 30 %
Jan 2016-June 2019 -3.3 % 52 %
July 2019-Jan 2021 70.4 % 14.9 %

*actual returns might vary

So unless you devote a lot of time tracking sectors and understanding the space (and self-assessment of this skill is dangerous) or you have great professional advice at your disposal, sectoral funds should be avoided. Ideally, a competent fund manager of a diversified fund should do this job for you. If she sees an opportunity in a particular sector, her fund should have a significant allocation there.

In a sectoral fund, it’s important to have a clear entry and exit strategy in place. Before you invest in them, please understand the risks they carry. Sectoral funds are more volatile compared to a regular fund, align your expectations accordingly. Also, be very sure of why and how they fit in your portfolio. Most importantly, if you are building a portfolio of 100 rupees, this shouldn’t be your first 50-60 rupees.

For the last 10 years or so IT sector funds have definitely been ‘safer’ than regular funds. Does that mean, they would continue to remain safer? I wouldn’t stick my neck out on that one. Banking, however, has been more volatile compared to regular funds. It has fallen more during difficult periods for equity markets. So, my advice to the retail investor is that they should play the diversified game and let the fund manager take the sectoral calls. That way you take less risk and safeguard your investment.