How to choose the best

It is not intended for everyone

Experts say sector and thematic funds are not for everyone. These funds should be looked at from a satellite perspective, as schemes that add flavor to your portfolio. This is because such funds place their hopes in one or several sectors.

As per the rules laid down by the Securities and Exchange Board of India, the capital market regulator, a sector or thematic fund must invest at least 80 per cent of its corpus in the sector or theme it tracks.

“We only suggest sector and thematic funds to investors who are able to bear the risk that these funds carry – the risk that that sector or theme may not perform as expected,” said Srikanth Bhagavat, managing director of Hexagon Capital Advisors. In such a case, one has to face loss of expectations, disappointment and sometimes even loss of capital.

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Bhagavat said his company had not recommended sectoral and thematic funds all these years, but had started suggesting them selectively in the last two years.

Gajendra Kothari, managing director of Etica Wealth Pvt Ltd., a Mumbai-based wealth management firm, said sectoral and thematic funds require a different mindset from investors.

“Those who have patience, control their temper and have patience with the advisor can invest in sector and thematic funds,” Kothari said, because some combinations may work, others may also fail.

Sector and thematic funds

Kothari has an interesting approach. Before recommending exotic high-risk funds or those with newer ideas to clients, he invests his own money and tries them out first.

His early investments in sectors such as public sector undertakings (PSUs), transport and more recently in Chinese funds have earned him profits. Since then – after becoming convinced about these sectors/topics – he has passed these funds on to his clients.

In search of the best topic

To dig diamonds out of the dust, a careful reading of the economy and the market is essential. Ravi Kumar TV, director of Gaining Ground Investment Services, said his company recommends thematic funds that have high growth potential in the long run.

“Consumption is a special topic that we believe should be in the portfolio of every long-term investor,” he said.

In search of the best thematic/industry fund

Harsha Upadhyaya, chief investment officer – equity and debt at Kotak Mahindra AMC, urges investors to look for opportunities in their everyday lives: from a morning cup of tea or coffee (consumption theme) to traveling to work by car or public transport (production theme). to using city roads and viaducts (the topic of infrastructure) and spending time at work (technology), Upadhyaya points to topics that surround us, influence our lives and are easier to identify.

Earlier this week, Upadhyaya spoke about the benefits of sectoral and thematic funds to MF distributors and investment advisors during a month-long seminar organized by NetworkFP, a platform that helps financial planners build a practice, to educate them about the different categories of mutual funds and how to get the most out of them .

Over time, sectors and topics have also evolved, Ravi Kumar told TV. The banking and financial services fund covers not only banks, but also includes insurance, asset management, fintech and housing finance companies.

“The latest thematic funds are no longer concentrated portfolios, but broad-market funds that include many companies operating in that particular theme,” he said.

SIP or lump sum

While distributors and advisors usually suggest systematic investment plans (SIPs) to investors, sector and thematic funds are not really bound by such general principles. When Etica Wealth’s Kothari first invested in a PSU solution four years ago, he wasn’t sure how it would work, so he opted for an SIP. For the first three years, the PSU theme did not work.

“If my investors had invested the lump sum at the same time as me, they would have already given up because their lump sum would not have gone anywhere. However, in the fourth year, the theme performed very well and the investment in SIP paid off,” Kothari said.

Ravi Kumar TV is also flexible.

“Some themes may have a shorter duration due to different macro cycles. A lump sum amount may be preferable here. SIPs can be considered for long-term issues such as consumption, banking and financial services, healthcare and technology,” he said.

How much to allocate? Bhagawat said it is important to determine how much exposure is needed in sectoral and thematic funds to reduce risk.

“No more than 10-20 percent of the total portfolio should be invested in such funds. This way, even if it doesn’t work out, it won’t have a major impact on the broader portfolio,” said Bhagavat, who invested in banking and finance and manufacturing.

How long to invest

The typical comprehensive long-term approach may not always work. Kotak MF’s Upadhyaya said the timing of entry and exit from thematic and sector funds is crucial as different sectors have phases of outperformance and underperformance.

“When it comes to investment time frames, we always prefer the longest possible time frame,” Bhagavat said. “But we must realize that sometimes markets move faster than expected. Valuations are peaking faster than we expect. In this case, the time frame becomes irrelevant. If topics and sectors seem overvalued at this point, then we exit. A sharper eye is needed.

Ashish Chadha, a registered investment advisor in Gurugram, said that topics like transport and infrastructure are high-beta funds – you need to be a bit more proactive and exit the fund at the right time. But he added that fast-moving consumer goods, pharmaceuticals and banking are long-term trends.

Chadha has an interesting approach to sector and thematic funds. As an advisor, he recommends them to those who like to go a little crazy with their wallet.

“We make good money on sector funds for our clients. This also keeps them busy reading. This prevents distortion of larger asset allocation and we can hold capital for 10-15 years and beyond without trading,” Chadha said.

Kayezad E Adajania heads the personal finance office at Moneycontrol. He has been involved in investment funds and personal finance for twenty years, working for Mint and Outlook Money magazines. Kayezad was a founding member of Mint’s personal finance team when it was launched in 2009.

Dhuraivela Gunasekaran