Ask Morningstar: Action points for thematic funds in a portfolio

By Himanshu Srivastava |  06-10-22 | 
 

I am 74 years old. My mutual fund portfolio is Rs 50 lakh. Of these, ICICI Technology is one fund with an exposure of about Rs 15 lakh. This lumpsum investment was done in April 2022 when the fund was reporting very high XIRR. Since then the performance is consistently going down and I am thinking of switching partly or fully to HDFC Nifty Index Fund. Is this a right strategy? Is this the right time to exit?

You have not mentioned how much of your mutual fund portfolio of Rs 50 lakh is in equity or debt. ICICI Technology Fund itself accounts for almost 30% of the portfolio. This is a huge allocation.

Moreover, given your age, if the entire portfolio is in equity funds, I am assuming that you have a regular stream of income to take care of expenses.

Equity investing is a high risk – high return investment proposition, and within that, sector/thematic funds are even riskier.

Unlike diversified equity funds, the fund manager of a sector/thematic fund does not have the liberty to shift to any other sector, when the underlying sector goes through a rough patch. And currently IT sector has hit rough weather. Technology funds did well during and post covid period, and that is when lot of investors started to invest in these funds. However, the IT sector has struggled this year, largely driven by global headwinds. Surge in interest rates globally to tackle stubborn inflation has fanned concerns that the U.S. and European economy may face a possible recession, which could impact the sales, revenue, and growth of IT stocks. This has also impacted Indian IT stocks, as a huge pie of their earnings comes from these developed markets.

There are certain pre-requisite traits that investors in sector/thematic funds must possess. They should have an appetite for high risks and volatility associated with such investments. Sector funds are typically cyclical in nature. Therefore, investors must have some knowledge on the sector, or they should understand its dynamics to time their entry and exit from it. Else, at least they should have the resources in place who can help and guide them to make informed investment decisions.

At this juncture, I would like to highlight a study that we recently did to give you better perspective on investing. This study is called – ‘Mind the Gap’. It talks about the difference between the fund return and the return investors would have made by investing in it. Most often than not, investor returns tend to be lower than the fund returns because most investors invest in a fund when it has done well and redeem their investments when the fund struggles as they lose patience. However, investors who stay invested in a fund through a market cycle are positioned to earn better returns.

Interestingly, the investor return gap is the highest for the Technology sector funds - meaning while the funds from this category has returned around 27% and 25% over 3- and 5-year period respectively (as of June 2022), an average investor has made only 3% to 4% over these time frames. This is largely because, they have entered the fund after the returns came.

  • If you have invested in this fund after understanding the risks associated with it, then you should consider staying put. The sector can be expected to rebound once the underlying scenario changes. However, that could take time and may test your patience.
  • If you were not aware of the risks in these funds, but have the risk appetite to withstand the underperformance and stay invested through the market cycle, then still you can consider staying put and wait for the tide to turn, like many sector fund investors do. If the underperformance in this fund is not altering your financial condition, then that would mean that you can withstand this volatility. However, the call must be yours.
  • If you were not aware of the risks and do not have the appetite to withstand the fund’s underperformance, then the best way would be to approach a financial adviser who could guide you better looking at other factors and information, which unfortunately we don’t have. The adviser would help you make the necessary changes in the portfolio in line with you risk appetite and investment objective.

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Articles authored by Himanshu Srivastava

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Registered readers can post their queries by accessing the Ask Morningstar tab. Our team will answer SELECT queries relating to mutual funds, portfolio planning and personal finance. While we provide broad guidelines, we suggest you consult a financial adviser before making investment decisions.

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Rama kanta dhar
Oct 10 2022 11:17 AM
 good suggetion
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