This post has been written by Kaustubh Belapurkar, Director of Fund Research at Morningstar Investment Adviser India. It initially appeared on Moneycontrol.com.
Sector funds often catch the attention of investors as more often than not they top the absolute short-term performance tables. But, it is important for investors to understand that sector funds can deliver lumpy performance versus the broader benchmarks on a year on year basis.
Also, the best performing sector can change every year. Last year’s winner may be this year’s biggest loser.
Looking at the yearly returns table above, the trend is quite evident; no sector can consistently outperform the broader markets, although sectors such as banking purely by the virtue of being the largest weight in the index can display a slightly more consistent trend.
But years like 2013 and 2015 have clearly shown that banking funds displayed a much-varied performance versus the benchmarks as some of the other sectors performed rather well in those years.
The case with other sectors is even more polarised, for instance, the technology sector which has been going through an increasingly rough patch over the last few years. Tech funds beat the market hollow in 2013, but haven’t been able to keep pace since.
Investor behaviour has been interesting in sector funds, in the bull rally of 2005-2007, sector funds did gain a fair bit of popularity on the back of spectacular returns, but the 2008 crash left many investors with mismatched expectations.
Ever since the allocation to sector funds has been displaying a declining trend. Banking and Healthcare are the most popular sector fund holdings amongst investors, where investors have added some exposure over the last few years, whilst the other sector funds have witnessed stagnating/declining assets or in the case of Energy Funds a sharp drop in assets under management.
This is despite the fact that the overall industry has been witnessing significant flows. Most investors are now looking for more diversified fund exposure.
Whilst sector funds allow you to express a specific sector view, they may not suitable for all investors. First-time equity investors or risk averse investors who do not have the wherewithal to take a call on sectors are much better served investing in diversified equity funds.
Savvy investors who would like to express their views on particular sectors can look at adding some exposure to these funds but will need to keep a nimble investment approach.