​​​Add dynamism to your portfolio with sectoral and thematic funds

The Indian equity benchmark Nifty 50, impelled by weak global and domestic cues, returned a paltry 10.22% in the one year ended August 2016. However, Nifty Realty delivered 27% in this period on the back of robust demand in the sector. To give investors an opportunity to benefit from sectoral and thematic trends, mutual funds in India offer sectoral and thematic funds. Investors with a high risk appetite should invest in such funds as sectoral and thematic funds tend to be riskier of all mutual fund schemes.

Sectoral funds invest in specific sectors to allow investors to cash in on sectors with strong growth potential. For instance, banking funds invest in banking stocks, pharma funds in pharma stocks, and so on. Concentration on few sectors makes them volatile. Performance of these funds is linked to the underlying sectors. For instance, the IT sector posted remarkable performance during January 2009-December 2013 owing to weak rupee, positive global cues and order wins for domestic IT companies. Nifty IT index gave 33% CAGR returns during this period. (Source: CRISIL Research database- Table below)

Thematic funds invest across sectors related to a common theme. This trait makes them less volatile than sectoral funds. Unlike sectoral funds, thematic funds are more to do with a particular theme and not a specific sector. For example, an infrastructure thematic fund invests in companies doing business with infrastructure construction projects, steel, cement, and the like. Here the companies may be from different sectors but are centered around a common theme. The objective of these funds is capital appreciation by investing in companies involved in infrastructure related activities. To meet the objective, these funds have invested in sectors such as banking, cement and construction projects.

Some of the other popular thematic funds are MNC funds (focusing on the multinational companies), India reform funds (benefit from the Centre’s reform push) and rural India funds (invest in companies catering to rural India including consumer durables, finance and auto). Thematic funds could also be related to the style of investing such as dividend yield funds, value investing or contrarian style funds.

Performance

To chart the performance of these funds, we looked at sectoral index movement.

Chart 1: Trend of key sectoral indices

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Source: CRISIL Research database, 2016 data is as on August 31, 2016

Past performance may or may not be sustained in future

Suitability and choice of the right fund

Thematic and sectoral funds are meant for investors who have a fair idea about themes/sectors. These funds are the most risky among all mutual fund categories and, hence, are suitable for investors with an aggressive risk profile. They are labeled 'high' on the riskometer.

Investors can choose these funds after closely studying the underlying sectors/themes growth prospects and risks associated with them. These funds should be used to generate more alpha. Investors can also choose the Systematic Investment Plan (SIP) route.

Summing up

One can supplement the core portfolio of diversified schemes with a small allocation to sector/thematic funds to help investors enhance returns. Since these funds are more volatile, investors should research the prospects of sectors/themes or get the help of a financial advisor.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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An investor education initiative, SBI MUTUAL FUND.