Sectoral bets: The wait for returns can be longer..
Whenever a particular sector performs well, inflows into sectoral or thematic mutual funds surge dramatically, indicating investors chase returns. However, these sectors can underperform for extended periods, making timing crucial; for most investors, diversified mutual funds are a better option.
The following charts show the sporadic returns from sectoral indices and highlight how some sectors have underperformed for longer periods.
- The 10-year return in various sectors vs the Nifty 500 has been pretty close. However, the performance in the former came with a lot of volatility expressed by the standard deviation.
2. Sectors go through cycles, and they can take very long periods to deliver returns. Timing the entry and exit is quite important when taking bets on individual sectors.
3. Here are the key points to note when investing in sectoral funds, as suggested by Vishal Dhawan, a Sebi-registered investment advisor
a. Sectoral/thematic funds clearly go through cycles
b. Some sectors may have a longer downside period than others
c. Underperformance can continue for a long period of time
d. Enter sector/thematic funds, either because you can time your entry and exit right or with a very long-term investment horizon
e. Limit portfolio exposure to 5% to 10%.
f. Broad-based index (Nifty 500) has a decent ride compared to others.
