Monday, October 31, 2016

October 2016

Investors pumped in over Rs 16,000 crore into various mutual fund schemes in September 2016, with liquid or money market segment contributing the most to the inflow. With this, the total net inflow in mutual fund schemes has reached Rs 2.34 lakh crore in the April-September period of the current fiscal. In comparison, mutual funds had witnessed an inflow of Rs 80,895 crore in the same period a year ago. According to the data from the Association of Mutual Funds in India (AMFI), investors have poured in a net Rs 16,071 crore in mutual fund schemes in September 2016 compared to Rs 25,332 crore in August 2016. Prior to that, mutual fund schemes had witnessed an inflow of Rs 1.03 lakh crore. The latest inflow has been mainly driven by contribution from liquid or money market segment. Besides, equity schemes continued to witness positive inflow. Liquid or money market segment witnessed Rs 19,630 crore being poured in September 2016, while equity and equity-linked schemes saw net inflows of Rs 3,743 crore. In addition, balanced funds saw net inflow of Rs 3,275 crore. However, income funds or debt schemes saw an outflow of over Rs 11,000 crore. Overall, the asset base of the country's fund houses increased to Rs 15.80 lakh crore in September 2016 from Rs 15.63 lakh crore in August 2016.

Regulatory Rigmarole

From October 1, 2016 AMCs are to disclose the absolute commission paid to distributors in half-yearly common account statements. This figure will also include all direct monetary payments and other payments made in the form of gifts/rewards, trips, event sponsorships by AMCs to distributors. There is some relief for distributors as SEBI has asked AMCs to mention in the footnote that this figure does not exclude costs incurred by distributors such as service tax, operating costs, etc.
In order to ease the RIA registration process, applicants can now apply online on SEBI website. In addition, the market regulator has done away with the submission of physical application forms. In a circular issued by the market regulator, SEBI said, “Applicants seeking grant of registration as Investment Advisers and Research Analysts are now required to submit only online application to SEBI at The user manual available in the portal has instructions on how to submit the applications.”Until now, applicants seeking RIA registration were required to submit their application forms either through post or by visiting SEBI office. Since many advisers are not comfortable sending their personal details through post, they prefer to visit the SEBI office and get acknowledgement of receipt of their application forms. The online application procedure is expected to save time and effort of the applicants. Meanwhile, the regulator has allowed the existing RIAs to file their compliance report online through the online portal. SEBI said that emails have already been sent to all the RIAs to activate their online accounts.This may help RIAs consolidate all reports at one place. Typically, SEBI sends email or calls RIAs to get such reports. RIAs can now directly upload their compliance reports on this portal.
BSE has said that SEBI Registered Investment Advisors can start transacting through BSE StAR MF from November 4, 2016. “BSE is pleased to offer BSE StAR MF platform to SEBI Registered Investment Advisors (RIAs) to purchase and redeem mutual fund units on behalf of their clients with effect from November 4, 2016,” states the circular issued on October 24, 2016.The guidelines for registration and operations will be issued shortly. BSE Star MFD will continue to be a B2B platform and direct plans will not be allowed on this platform. BSE will come out with a platform for RIAs called BSE Star MF RIA in which it will only offer direct plans.SEBI has recently allowed RIAs to initiate transactions on stock exchange platforms for their clients.  “In order to broad base the reach of this platform, it has been decided to allow SEBI Registered   Investment   Advisors (RIAs) to   use   infrastructure   of   the   recognized stock exchanges to purchase and redeem mutual fund units directly from mutual funds on behalf of their clients, including direct plans,” stated the circular.So far, only MF distributors, stock brokers and clearing members were allowed to transact through stock exchange platforms.
SEBI has come out with a consultation paper which proposes a host of amendments to SEBI (Investment Advisers) Regulations 2013.
Here are the key proposals of the consultation paper:
On exemption provided to mutual fund distributors
·         SEBI proposes to do away with the exemption given to mutual fund advisers in which they are allowed to charge a fee for mutual fund advisory services apart from commission income.
·         No one can use nomenclature like ‘independent financial advisers’ (IFAs) and ‘wealth managers’ without registering with SEBI as RIA.
·         Individuals who opt to continue with the current model of commission can use the nomenclature ‘mutual fund distributor’. Such mutual fund distributor cannot recommend any product or give any advice; they can describe product specification
·         The silver lining is that distributors who opt for RIAs can continue to get trail commissions on existing AUM. However, they have to disclose this to their clients.
·         RIAs cannot accept fee in cash - only cheque, draft, NEFT, RTGS, IMPS, etc.
·         RIAs registered under individual category cannot provide execution services
·         Client or adviser can terminate business relationship by serving a one-month notice. However, if a client is not satisfied with the services, they can end it at any point of time subject to refund of the proportionate advisory fee.
On exemptions given to other professionals
·         The market regulator has proposed to put professionals like stock brokers, portfolio managers, chartered accountants and company secretaries under the purview of Investment Adviser regulations. That means, these professionals will also have to get themselves registered with SEBI to give even an investment advice incidental to their profession.
·         Exemption will be given to merchant bankers, agents (only for insurance advice) and retirement advisers (only for retirement advice) subject to advice related to the products regulated by their respective regulations.
Advice through subsidiary
·         RBI has proposed that banks and NBFCs will have to float a separate department or divisions to provide advisory services. Such entities may now have to float a separate subsidiary to provide investment advice.
·         Banks or other such firms cannot force their customers to avail execution services from them.
Other key proposals
·         Persons providing investment advice through any broadcasting or telecommunication media will have to comply with RIA regulations.
·         No one can provide trading tips via WhasApp, SMS, WeChat, Twitter, Facebook etc. unless such persons obtain RIA license.
·         Carrying out risk profiling of corporate and institutional investors is not mandatory unless it is related to complex products like derivatives, structured products etc.
·         CFAs, CFPs, CWMs, Wealth Management Certification (Advance Level) by CIEL and International Certificate in Wealth & Investment Management by Charted Institute for Securities and Investment have been proposed to be exempted to appear  for NISM exam to obtain RIA license.
SEBI has given a time frame of three years to comply with the guidelines once it gets finalized.

Over half of SIP accounts have been active for more than five years, shows a note sent to fund houses by AMFI.Of the 1.09 crore SIP accounts as on August 2016, nearly 56 lakh or 52% SIPs are active for more than five years. This can be attributed to increased awareness about mutual funds and good fund performance. Increased awareness about the benefits of long term investments in equity funds through SIPs has helped industry achieve this milestone. Superior fund performance has also encouraged investors to stay put. In terms of monthly inflows, the total amount collected through SIPs has increased to Rs. 3,500 crore (Rs.333 crore under direct plans and Rs. 3,164 under regular plan) as on August 2016. In July 2016, the industry got gross monthly inflows of 3,350 crore from SIPs.Interestingly, the total AUM of SIP stood at Rs. 1.25 lakh crore as in August, which is around 8% of the overall AUM of the mutual fund industry.While the industry has added 5.74 lakh new SIP accounts in August, 3.29 lakh accounts were discontinued or matured during the same period. Overall, the industry has witnessed net addition of 2.45 lakh SIPs in August.Currently, the industry has over 1 crore SIPs in regular plans and 8.50 lakh SIPs in direct plans. The AUM of SIPs collected under regular plan is Rs.1.20 lakh crore whereas the AUM of SIPs collected through direct plans stood at Rs. 8,000 crore.

Monday, October 24, 2016

October 2016

Mutual fund industry's asset base surged by 12% to a record high of Rs 16.11 lakh crore in July-September quarter helped by strong participation from retail investors and robust inflow in equity schemes. The industry, comprising 42 active players, witnessed increase in average assets under management (AUM) to Rs 16.11 lakh crore in three months ended September 30, 2016, from the previous high of Rs 14.41 lakh crore during April-June quarter, data available with industry body Association of Mutual Fund Industry (AMFI) showed. Among the top five players, ICICI Prudential Mutual Fund led the pack with asset base of Rs 2,15,986 crore (excluding Fund of Funds) followed by HDFC Mutual Fund (Rs 2,13,086 crore), Reliance Mutual Fund (Rs 1,83,129 crore), Birla Sun Life Mutual Fund (Rs 1,68,881 crore) and SBI Mutual Fund (Rs 1,31,554 crore). The asset base of mutual fund industry has been growing in the last few years. In fact, AUM has increased from Rs 3.26 lakh crore as March 31, 2007 to Rs 16.11 lakh crore at the end of September 30, 2016, a five-fold growth in a span of less than 10 years. The industry's asset base had crossed the milestone of Rs 10 lakh crore for the first time in May 2014 and in a short span of two years, the AUM size has crossed Rs 16 lakh crore. 
Driven by addition in equity fund folios, mutual fund houses have registered a surge of more than 29 lakh investor accounts in the first six months of the current fiscal, taking the total tally to surpass the 5-crore mark. This is on top of an additional 59 lakh folios in 2015-16 and 22 lakh in 2014-15. According to the data from the Association of Mutual Funds in India (AMFI) on total investor accounts with 43 fund houses, the number of folios rose to a record 5,05,59,495 at the end of last month from 4,76,63,024 in March-end, a gain of of 28.96 lakh. Growing participation from retail investors, especially from smaller towns and huge inflows in equity schemes have helped in increasing the overall folio count. The equity category witnessed an addition of more than 15 lakh investor folios to 3.75 crore in April-September period of the current fiscal. 
Mutual Funds have invested over Rs 13,500 crore in equity markets in the first nine months of 2016 due to strong participation from retail investors. This is on top of over Rs 70,000 crore already invested in the entire 2015 and around Rs 24,000 crore in 2014. The inflow can be attributed to investment in systematic investment plans (SIPs) and strong participation from retail investors. As per the data released by the Securities and Exchange Board of India (SEBI), mutual fund managers invested a net sum of Rs 13,565 crore in the equity markets during January-September period of 2016. In addition, fund managers have infused over Rs 3 lakh crore in the debt markets during the period under review. The inflow is in line with BSE's Benchmark Sensex rising 1,748 points or 6.7% during the period under review. 

Piquant Parade

Fortune Financial Services & Fortune Credit Capital has received in-principle approval from SEBI to launch mutual fund business. At a time when foreign fund houses are exiting Indian asset management business, a few domestic players are gung-ho about starting mutual fund business. Fortune Financial Services & Fortune Credit Capital is listed on BSE and is SEBI registered Category I Merchant Banker. It also has a Portfolio Management Services (PMS) license. The company has four business verticals viz. Fortune Equity Brokers, Fortune Commodities & Derivatives, Fortune Credit Capital and Fortune Financial India Insurance Brokers. In June 2016, SEBI had given in-principle approval to Yes Bank which is expected to launch its operations within a year. Meanwhile, SEBI data shows that Trust Investment Advisors and Karvy Stock Broking are awaiting approval from SEBI to launch mutual fund business in India. While Yes Bank and Fortune Financial Services & Fortune Credit Capital have approached SEBI in November 2015 and June 2015 respectively, Trust Investment Advisors had applied for a license in September 2014. Karvy Stock Broking is waiting to get in-principle approval from SEBI since five years. It had applied for AMC license in November 2011. Interestingly, all four companies have a mutual fund distribution arm. AMFI data shows that Yes Bank, Trust Investment Advisors, and Karvy Stock Broking have assets under advisory (AUA) of Rs.678 crore, Rs. 1,115 crore, and Rs. 5,056 crore respectively as on March 2015.
AMFI has elected A. Balasubramanian, CEO, Birla Sun Life Mutual Fund as its Chairman. Balasubramanian has replaced Leo Puri who was appointed as the AMFI Chairman in 2015. G Pradeepkumar, CEO, Union KBC Mutual Fund is now the Vice Chairman of AMFI. AMFI’s committees were also reconstituted.  As the Chairman, Balasubramanian will head the Financial Literacy Committee. Nilesh Shah, Managing Director, Kotak Mutual Fund CEO, has been appointed as the Chairman of the Valuation Committee. Meanwhile, Sourabh Nanavati, CEO, Invesco will continue to head registration of Distributors Committee. Sanjay Sapre, President, Franklin Templeton will head operations and Compliance Committee. Currently, there are 15 members on AMFI board of which seven are from top ten fund houses and four each from mid and small sized AMCs.

to be continued…

Monday, October 17, 2016

October 2016

Closed-end tax planning NFOs adorn the October 2016 NFONEST.

IDBI Prudence Fund

Opens: October 3, 2016
Closes: October 17, 2016

IDBI Mutual Fund has launched the IDBI Prudence Fund, an open ended balanced fund. The investment objective of the fund is to generate opportunities for capital appreciation along with income by investing in a diversified basket of equity and equity related instruments, debt and money market instruments. It aims to invest minimum 35% of its assets in equity and equity related instrument, and equity investments will be limited to companies that are constituents of S&P BSE 500 Index and are having a total market capitalisation of at least Rs 2,500 crore at the time of investment. Besides, IDBI Prudence Fund also has a mandate to invest (upto 10% of its assets) in profitable arbitrage opportunities available in market at a given point of time to take advantage of spreads between cash and derivatives market. In the absence of arbitrage opportunity in the market the fund may invest that allocation in debt and money market instruments. In debt instruments, the fund has a mandate to invest upto 60% of its assets including fixed/floating rate debt instruments and securitized debt and money market instruments, and the debt instruments will be limited to those with A1+/ AA+ rating and above. The fund’s performance will be benchmarked against 50% S&P BSE 500 Index + 50% CRISIL Composite Bond Fund Index and its fund managers are V. Balasubramanian (equity component), and Gautam Kaul (debt component).

HDFC Dual Advantage Fund Series III 1267D

Opens: October 10, 2016
Closes: October 21, 2016

HDFC Mutual Fund has launched a new close ended hybrid debt fund named as HDFC DAF – Series III – 1267D. The fund seeks to generate income by investing in a portfolio of debt and money market securities which mature on or before the date of maturity of the fund. The fund also seeks to invest a portion of the portfolio in equity and equity related securities to achieve capital appreciation. The performance of the fund is benchmarked against CRISIL Debt Hybrid. Anil Bamboli, Krishna Kumar Daga, and Rakesh Vyas are the fund managers.

Sundaram Long Term Micro Cap Tax Advantage Fund -Series III

Opens: August 8, 2016
Closes: November 11, 2016

Sundaram Mutual Fund has launched a new close ended tax planning fund named as Sundaram Long Term Micro Cap Tax Advantage Fund – Series III. The fund seeks to generate capital appreciation over a period of ten years by predominantly investing in equity and equity related instruments of companies that can be termed as micro-cap and from income tax benefit available. The performance of the fund is benchmarked against Nifty Smallcap 100. Dwijendra Srivastava and S.Krishna Kumar are the fund managers.

UTI Long Term Micro Advantage Fund -Series IV

Opens: October 10, 2016
Closes: January 18, 2017

UTI Mutual Fund has launched a new close ended tax planning fund named as UTI Long Term Tax Advantage Fund – Series IV. The fund seeks to generate capital appreciation over a period of ten years by predominantly investing in equity and equity related instruments of companies along with income tax benefit. The performance of the fund is benchmarked against S & P BSE 100 Index. Lalit Nambiar is the fund manager.

Sundaram Long Term Micro Cap Tax Advantage Fund -Series IV

Opens: September 27, 2016
Closes: March 20, 2017

Sundaram Mutual Fund has launched a new close ended tax planning fund named as Sundaram Long Term Micro Cap Tax Advantage Fund – Series IV. The fund seeks to generate capital appreciation over a period of ten years by predominantly investing in equity and equity related instruments of companies that can be termed as micro-cap and from income tax benefit available. For the purpose investment by the fund 'micro cap' stock is defined as one whose market cap is equal to or lower than the 301st Stock by market cap (after sorting the securities in the descending order of market capitalization) on the National Stock exchange of India limited, Mumbai, at the time of investment. The performance of the fund is benchmarked against Nifty Smallcap 100. Dwijendra Srivastava and S.Krishna Kumar are the fund managers.

ICICI Prudential Value Fund – Series 9-12, ICICI Prudential Multiple Yield Fund Series 9, SBI-ETF Nifty Private Bank Fund, IDBI Midcap Fund, ICICI Prudential P.H.D. Fund, ICICI Prudential PSU Bank iWIN ETF, ICICI Prudential Sensex Index Fund, ICICI Prudential Nifty Low Vol 30 iWIN ETF, HDFC Dual Advantage Fund – Series IV, ICICI Prudential Capital Protection Oriented Fund – Series XI, and Mahindra Mutual Fund Badhat Yojana are expected to be launched in the coming months.

Monday, October 10, 2016

October 2016

Sometimes there is a need to concentrate on one particular area, in order to gain a higher understanding and benefit from the same. Investment in sector funds is the answer. It involves high risk. It is definitely not for the faint-hearted. Returns are also mind-boggling. But investors need to keep an eye on any downward trend in the sectors of their choice and should exit appropriately. Investors who are expecting high returns, but willing to embrace high risk can invest in the sector funds discussed below.
The consistent performance of all five funds in the October 2015 GEMGAZE is reflected in all the funds holding on to their esteemed position of GEM in the October 2016 GEMGAZE.
Canara Robeco Infrastructure Fund Gem
Building on the buoyancy
Canara Robeco Infrastructure Fund is a thematic fund focused on identifying growth-oriented companies within the infrastructure space. The fund, with an AUM of Rs 132 crore, aims at having concentrated holdings with 72.81% of the assets in the top three sectors and a bias towards large market capitalization stocks at 48.2%. With a well-diversified portfolio of stocks in the energy, construction, and services sectors, it employs fundamental analysis with a focus on factors such as the industry structure, the quality of management, sensitivity to economic factors, the financial strength of the company, and the key earnings drivers. The fund benchmarks the performance of its portfolio against the S & P BSE 100 Index. Canara Robeco Infrastructure has been among the better performers in its category. The fund’s one-year return is 14.98% as against the category average return of 11.13%. The expense ratio of the fund is high at 2.74% while the portfolio turnover ratio is as low as 28%. The fund has been managed by Mr. Yogesh Pant since December 2011.
SBI Magnum FMCG Fund Gem
Topper with potential
In the past one year, the Rs 276 crore, Magnum FMCG Fund is perched at the top with 56% of the assets in large caps. The expense ratio is 2.54% and the portfolio turnover ratio is 45%. Braving all odds, the one-year return of the fund is 11.68% as against the category average of 10.3%. Over the three and five year periods, the fund posted 15.72% and 21.58% of CAGR, respectively as against the category average of 15.73% and 20% respectively. Magnum FMCG Fund is benchmarked against the S & P BSE FMCG Index. Most stocks that operate in this space have already moved up because revenue and profit growth for these companies were still better than firms in beleaguered sectors. Despite high valuations, companies in the consumption space still hold strong growth potential, thanks to lack of viable alternatives in the market. FMCG funds are, therefore a good bet.  Saurabh Pant has been managing the fund since June 2011.

ICICI Prudential Banking & Financial Services Fund Gem
An evergreen fund
ICICI Prudential Banking & Financial Services Fund invests predominantly in large and midcap financial companies. 60% of the portfolio consists of large caps. This fund adopts a 'bottom-up' strategy, to identify and pick its investments across market capitalizations. The fund has not only outperformed its benchmark, the S&P BSE Bankex but has also outperformed other banking sector funds. The current AUM of the fund is Rs 1134 crores and the one-year return is 25.05% as against the category average return of 16.39%. The fund is managed by Vinay Sharma since February 2015.
SBI Pharma Fund Gem
Healthy prospects in the long run
SBI Pharma Fund sports an AUM of Rs. 1074 crores. The number of stocks held by the fund in the last few months has hovered around 19. The concentration analysis reveals that the fund has around 50.27% assets allocated towards the top 5 stocks while the top 10 stocks make up around 71.08%.  The one-year return of the fund is -6.67% as against the category average of -7.14%. The three-year and five-year returns of the fund are 26.47% and 27.36% as against the category average of 24.11% and 22.84% respectively. SBI Pharma Fund tops the list of pharma funds across time periods. The outperformance of the fund has been quite consistent. For instance, in the last five years, the scheme’s annual returns have been better than its benchmark almost 84% of the time. The expense ratio of the fund is 2.23% while the portfolio turnover ratio is 32%. A higher large-cap slant (over 55%) should hold the fund in good stead even during volatile times. The fund has been managed by Tanmaya Desai since June 2011.
ICICI Prudential Technology Fund Gem
Appetite for new technologies

Consumers’ appetite for new technologies has been driving growth in the technology sector for years. This is providing good opportunities for technology companies. ICICI Prudential Technology Fund is a Rs 282 crore technology fund, which invests in large technology oriented companies. It invests in companies listed in the BSE Teck. Its portfolio has 58% exposure to large cap companies. The fund seeks to invest in knowledge sectors like IT and IT Enabled Services, Media, Telecommunications, and others. The one-year return of the fund is -9.21% as against the category average of -6.05%. The three-year and five-year returns of the fund are 14.3% and 20.04% as against the category average of 12.33% and 16.01% respectively. The fund is benchmarked against the S& P BSE IT Index. The fund is managed by Mrinal Singh since August 2008.

Monday, October 03, 2016

October 2016
Sector mutual funds are those mutual funds that restrict their investments to a particular segment or sector of the economy. Also known as thematic funds, these funds concentrate on one industry such as infrastructure, banking, technology, energy, real estate, power, health care, FMCG, pharmaceuticals, etc. The idea is to allow investors to place bets on specific industries or sectors, which have strong growth potential. 
Infrastructure funds as a category delivered strong returns of 63% during the 2014 rally when cyclical stocks sky-rocketed on hopes of big-bang reforms. But these funds lost steam in 2015, as buoyant expectations soon gave way to a renewed downturn. Most funds closed the year with minor losses of 0.5%. However, prospects of a pick-up in the reforms momentum rekindled hopes. It is no surprise then that infrastructure funds have bounced back over the last one year. The top five infrastructure funds with a corpus of over ₹100 crore have gained 18.2%, much higher than S&P BSE Sensex which gained 11%.
Banking funds were under performing in the last 6 months to 9 months. The main reason is due to provisioning guidelines for NPA by RBI. Most of the banking stocks took a beating up to 80% of the stock price. In the last few weeks, the stock prices are going up.
FMCG funds continue to remain consistent performers and have been best performers in the last year.
Pharma funds continue to underperform on negative news flows and are the worst performers last year. However, over a longer period of time, they remain the best performing category.
IT funds are among the worst performing category as concerns impact on business and IT spending post Brexit and lower guidance by the managements have impact on stock prices.
PSU funds gave 4-5% higher returns when compared to Sensex or Nifty last year.
There are advantages to investing in a sector fund.
Diversification:  Rather than going with a single stock, you go for a bouquet of stocks in the same sector. By investing in a sector fund, you do diversify risk among the stocks in the same sector. A specific stock may suffer or perform badly due to a company specific development but the other stocks in the same sector will provide the cushion.
Fund manager expertise:  A fund manager, using the research resources at his disposal, is more likely to choose the best stocks in a sector than an average investor.
Better returns:  If your conviction and research about a sector is right, you do stand to reap better than market profits. Sectoral bets, if you get them right, can give you handsome returns.
Even as investors in mid- and small-cap equity funds are sitting on handsome gains made over the past few years, sector-focused funds have delivered higher returns over a longer term. A look at the 10-year performance of mid- and small-cap schemes shows that these have delivered a return of 15% CAGR (compound annual growth rate), compared with around 18% by funds focused on banking, pharma and FMCG sectors. 
In effect, sectoral funds provide a tactical exposure to the investor's portfolio. If you pick the right sector, you stand to reap higher rewards than you would by investing in the broader market. In the past five years, for instance, pharma and FMCG-focused funds, the so called defensive bets, have clocked 22.7% and 19.8% CAGR, respectively. If you had adopted a tactical position and invested in these funds, your portfolio returns would have exceeded those of the broader market. Unlike a sectoral fund, most diversified equity funds will not go beyond a certain limit in taking a meaningful stance on a sector.
Let us list out a few negative issues associated with investing in sector specific funds.
1.      Timing the market: To grow wealth in stock markets, time in the market is more important than timing the market. Unfortunately, to make money in the sector funds, you may have to learn to time the market especially in the cyclical sectors such as banks, cement, steel, etc. For example, banks (or banking stocks) outperform when the interest rates are low or are expected to fall and underperform when the interest rates are rising. So, to invest in a banking fund, you have to be at the right turn of the interest rate cycle to outperform broader markets. Though you must choose the SIP route to build exposure to such funds, you must close those SIPs and exit position in the sector funds when the sector fundamentals begin to deteriorate.
2.      Low diversification: Sudden adverse development in a particular sector will hit all the funds investing in stocks in that sector. However, the sector funds (that invest solely in stocks in that particular sector) will be hit the hardest. In an equity diversified fund, you would have stocks from other sectors to soften the hit.
3.      Finding good companies in a single sector is not easy: A mutual fund typically invests in at least 15 to 20 stocks. Finding these many good companies in a single sector is not easy. For example, the incumbent central government is expected to give a strong push to infrastructure and housing sectors. This may make you bullish about companies in construction, engineering and real estate. However, if you are asked to name a few listed companies with excellent balance sheet and high standards of corporate governance in construction, engineering and real estate, you would struggle to name even five. The fund mandate does not allow much leeway to the fund manager and pick stocks outside the specific sector. Hence, by choosing to invest with sector funds, you may be betting your money on stocks on low quality companies.
4.      Correlation: If you work with a software company, you salary, future salary hikes and job security are linked to performance of the IT sector. If you concentrate your investment too in the technology sector funds, you are taking higher risk since your salary and investments are correlated with the performance of the IT sector. A slowdown in the IT sector will be a double whammy.
5.      Higher risk: Since this category of funds is exposed to a single sector and only a handful of stocks, it carries a higher risk compared with diversified equity mutual funds. In some funds, the top five stocks often account for more than 50% of the portfolio. A downturn in one or two portfolio holdings can hurt the return of the entire fund even if the broader sector fares well. A traditional diversified equity fund, on the other hand, will typically invest only 25-30% of the portfolio in its five largest bets, thus providing a cushion against a slide in any of its top picks. Also, unlike a diversified fund, the fund manager of a sectoral fund does not have the liberty to move away from the sector even if its performance deteriorates. For example, if the infrastructure sector is doing poorly, an infra fund will have to remain invested in the sector because of its mandate. This leaves investors with a struggling fund. In contrast, a diversified fund's manager has the flexibility to get out of a sector facing headwinds and shift his investments to a sector with better promise.

Considering both pros and cons of investing with sector funds, equity diversified funds is the way to go. However, if you have strong knowledge about a particular sector through professional experience or otherwise and can judge the impact of various events or government policies on stocks in that particular sector, then it may not be exactly unwise to invest in sector funds. However, investing in sector funds is akin to investing in stocks. You invest in such funds only till the time fundamentals of that particular sector are good. You exit your position as soon as sector fundamentals begin to deteriorate. Hence, though you should still take the SIP route to invest in sector funds, SIPs should be closed as soon as sector fundamentals begin to deteriorate or the industry cycle starts to turn for the worse. Under equity diversified funds, you continue with your SIPs to get the advantage of rupee cost averaging.


Keep the following suggestions in mind while investing in sector funds:

Fund selection is key 

Fund selection within the chosen sector is, of course, critical. Even though the focus is on one segment, funds within a category come in multiple flavours. This is particularly true in the case of banking and infrastructure funds. For instance, some banking funds are tilted towards private sector banking stocks and NBFCs, which have better asset quality and higher profitability. These have delivered healthy returns for investors, unlike some public sector bank-focused funds, which have yielded poor returns in recent times. There is an even greater disparity in the infrastructure fund basket. These funds are known to invest across a variety of businesses, even those remotely connected to infrastructure. Funds in the pharma, FMCG, and technology basket, on the other hand, are of the same type. Invest only in those sectors where you have strong background knowledge

Take limited exposure 

If you do not have the stomach for the higher degree of volatility of sectoral funds, stay away from this category. Those willing to take the risk should go only for a limited exposure. Stick with only one or two sectoral funds. Having multiple sector funds within your tactical allocation will dilute the entire purpose of taking a focused exposure. Sector funds should not make up more than 10-15% of your portfolio.

Do not look at past returns 

Do not invest on the basis of past returns. Too often, investors gravitate towards the flavour of the season and latch on to a sector when the rally is already under way. The investors who entered at the height of frenzy around the technology sector in 2000 or infrastructure in 2007, ended up participating only in the slide. That is not to say that you should take a contrarian approach and invest in a sector that is out of favour. Invest only if you are convinced that the sector's prospects are improving or it is poised for growth. 

Size matters 
Opt for funds that are relatively large-sized and have a proven track record. If the scheme is too small or a chronic underperformer, chances are the fund house may merge it with another fund from its stables.

Do not invest via SIPs 

While investing in traditional equity funds, investors are advised to take the systematic investment plan (SIP) route. SIPs help ride the volatility over a period of time through cost averaging. However, this approach would not serve well if you are hoping to make the most of a sector upswing. When the sector has picked momentum, there is no point averaging your cost as it will dilute your returns. At the most, you could stagger through 4-5 smaller investments, but not through a long-term SIP.

Have an exit strategy 

Sectoral funds tend to perform differently across market phases and the winners keep rotating. Some funds, particularly those that are cyclical in nature like infrastructure or power, are not buy-and-hold type of investments. Also, do not assume that sectors with stronger fundamentals, such as FMCG and pharma, will always see a secular bull run. You should invest in such funds only till the time the sector's fundamentals are on a strong footing. Greed is not good. Conversely, do not hesitate to pull out of your investment at a loss, if it does not work out as you had hoped. Needless to say, you need to monitor your investment on a regular basis.