Advisers caution clients lured by sector funds

By Ravi Samalad |  17-11-20 | 

The Sensex has zoomed past 40,000 and has gained 69% since its ferocious drop in March 2020. The gradual unlocking coupled with festive demand has helped post a recovery in consumption demand and business activity, as witnessed from leading indicators such as energy consumption, and credit growth. Further, recent news on the possibility of Corona vaccine has provided a further stimulus to the market sentiment.

The rally in markets coupled with declining interest rate in bank fixed deposits is attracting investors towards equities. “Since interest rates on bank fixed deposits are low, even conservative investors are looking for higher returns through equities. I’m recommending such clients systematic investment plans in equity and debt funds,” says Mumbai-based distributor Viral Bhatt.

Small and mid cap funds have made a decent recovery since the lows of March 2020. One year category average returns in mid cap and small cap funds stood at 12.19% and 16.98%, respectively. Advisers say that some of their clients are opting to shift from equity to debt funds or book profits after this recent rally. This is evident by cumulative net outflows of Rs 9,939 crore since July 2020 till October 2020 from equity funds. “Some of my high net worth clients are shifting a portion of assets from equity to debt and will re-enter when markets correct in future. As markets have recovered, some clients are booking profits. Since lockdown, many investors have started trading in stocks. Most of my clients are systematic investment plan, or SIP investors. They don’t time the entry and exit and are focused on their goals,” says Warangal-based distributor Shiva Prasad Konduru.

Three themes/sectors which have stood out in this market are gold, healthcare and information technology sectors which can be seen in the table below.

Returns as on November 13, 2020.

Economic uncertainty pushed gold prices to all time high when countries around the globe went into lockdown. Gold Funds/ETFs have delivered 32% return over one year. Healthcare sector has been another major beneficiary. The category average returns of healthcare funds stood at 58.20% while information technology funds have delivered 43.13% return during the same period.  Some fund houses are launching healthcare and IT funds to capitalise on this opportunity.

Should your clients invest in thematic funds?

While thematic/sectoral funds have delivered mouth-watering returns, advisers are cautioning their clients not to get swayed by their recent performance. “I’m not recommending clients to invest in pharma funds because the stocks have run up a lot,” adds Shiva.

Choose judicoiusly

Mumbai-based distributor Vinod Jain says some of his clients are enquiring about international funds, technology and pharma funds which have topped the charts. Vinod recommends sector funds only if the client is not getting exposure to certain sectors through existing diversified funds. He cites an example of financial services sector funds. “It would not make sense to invest in a financial services sector fund because existing diversified funds anyway have 30-40% exposure to financial services. The case was different in 2013 when diversified funds held 10% in financial services. At that time having separate exposure to financial would have made sense,” explains Vinod.

Have a long term view

Mumbai based distributor Rushabh Desai is of the view that if investors wish to consider investing in thematic funds, they should have a long term view and be mindful of entry and exit from such funds. “Many investors have been lured towards certain sectoral and thematic funds seeing the huge rally especially in the pharma/healthcare and IT space. Investors should understand that these funds are highly cyclical in nature and need very precise entry and exit timing to get optimum returns. The pharma/healthcare space has seen a huge run-up this year. The valuations of the Nifty pharma index are definitely high but relatively comfortable, particularly relative to Nifty 50. This space will remain a beneficiary of the increased focus it has got due to COVID-19. This space is only meant for high risk, bold and seasoned investors with a minimum time horizon of 6 to 7 years. Investors should strictly invest on dips and understand that money will be made in the long run and not in the short run.”

Historical performance of different sectors

This table shows the calendar year returns of different sectors from 2010 to 2019. In 2010, the best performing sector was Consumer Durables which delivered 67.93% return. In 2011, when all indices were in red, only FMCG sector stood out by delivering 9.53% return. In 2012, BSE Bankex was the top performer, yielding 56.72% return. In the same year, IT Sector delivered - 1.18% return. In 2013, the IT sector bounced back and posted the highest return among all sectors at 59.78%. This clearly indicates that the winners rotate. No single sector delivers consistently every year. Thus, investing in sector funds is akin to timing the market by taking tactical calls. The tactical call may play out as per your expectation, but the returns may not be positive or consistent every year.

Avoid lumpsum

With large foreign institutional investors, or FII, inflows, early recovery indicators of macro numbers and with the indices touching all-time highs the sentiments amongst the investors at all levels have turned dramatically positive in a short span of time. Should your clients invest through SIP or lumpsum at this juncture? Given the expensive valuations, Rushabh is recommending his clients to avoid putting lumpsum in large caps at this juncture. “Currently the markets have been very polarised driven by surplus liquidity. With the Nifty 50 at its high, the price to earnings of the index is trading at around 23% premium to its 10 year average. Observing the high valuations in the large-cap segment and the rising concerns of the second wave of the Corona virus which has become a reality in many countries investors should be very cautious and should avoid investing lumpsum amounts in the large cap space at this time.” (Data as on October 31, 2020. Source: MOSL)

Notwithstanding which sector/themes are doing well, advisers recommend that investors should stick to their target asset allocation and rejig their portfolios only if there is a sharp divergence from their original asset allocation.

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