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Over the past one year, diversified fund categories such as large cap funds and flexi cap funds have given weak or negative returns in line with the underperformance of the broader market. Last year Nifty 50 TRI has returned just 0.6%. some regional and subject fund However, this trend has been managed to overcome. For example, some of the top performing infrastructure funds and consumption funds have delivered 1-year returns of 6-11% and 7-12% respectively. While the current market correction may provide a good investment opportunity, equity investors may be better off taking a cautious look at sectoral and thematic funds.

such funds Follow a focused investment strategy and invest at least 80% of your corpus in stocks related to that specific sector or topic. Investors have access to sector funds (which focus on IT, pharma, and banking and financial services, among others) and thematic funds (for example covering a broad range of topics such as consumption, infrastructure, business cycles, manufacturing and ESG) ) which go one by one. special area.

time entry and exit

The key to earning returns from sectoral and thematic funds lies in the right timing of your entry and exit from these funds. Also, in the case of diversified equity funds, where buying and holding a fund that has performed well for a long period may work well, it may not always be the case for such a fund. Vidya Bala, Co-Founder, PrimeInvestor.in, says, “These funds have a long tenure like any other equity fund, but the right entry and willingness are the necessary steps to book profits.

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Given the cyclical nature of most sector and thematic funds, correctly identifying the cycle and investing near its beginning and exiting when it starts at the peak can be the key to generating returns. Taking the example of infrastructure funds, Bala highlighted that such funds can undergo underperformance for a long period of time before finally delivering and hence, market timing is crucial here. But, others such as IT and consumption, which are both defensive bets, can be held over the long term and still deliver.

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Vishal Dhawan, Founder and CEO, Plan Ahead Wealth Advisors elaborates on this. “If you think the IT sector will benefit from the increasing trend towards digitization, then IT funds can be kept for a longer period. Growth in banking reflects the state of economic growth and hence banking funds can also be considered as a long-term bet.”

Rishabh Desai, founder of Rupee with Rushabh Investment Services, says that banking stocks are a good part of most flexi cap funds. So, if you have flexi cap funds, you do not need to switch to banking funds.

Also, note that compared to sectoral funds with holdings concentrated in one sector, thematic funds—given their broad coverage in certain sectors—can be relatively less focused.

Dig Deep, Ignore Popularity

Another point to keep in mind for regional and thematic funds is to understand what risk they actually carry. A good example of this is the infrastructure fund. While these funds should invest extensively in infrastructure stocks, the definition of ‘infrastructure’ is not indisputable. For example, many of these funds have capital goods, construction materials, cement and industrial products among their top sector holdings, while others also include automobiles and banking.

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Depending on the choice of stock, infrastructure fund returns can be broad, says Bala. IT funds or banking and financial services funds, on the other hand, are likely to have a similar structure – with higher repeats in the top 5 stocks, although the weight may vary.

Dhawan emphasizes that one should also pay attention to the composition of the portfolio. Since sector and thematic funds can be highly focused, it is worth examining whether certain stocks carry too much weight in a portfolio. Apart from this, Dhawan advises to stay away from trending funds. “Thematic funds which are very popular are likely to do well in the recent past and hence have become costlier in terms of valuations,” he says.

How to use thematic funds

According to Bala, one can use thematic funds to increase the returns in their portfolio. But one must have an understanding of the sector or theme and track the fund regularly. Also, one must be prepared to see a sharp decline in between. She suggests investors with smaller portfolio sizes (for example, less 10-15 lakhs) may ignore subject funds.

“A very small percentage allocation will make no difference, and a very large allocation may have an adverse effect,” she says. “Today, specific pockets in capital goods and transport and logistics are looking good and this provides infrastructure and manufacturing funds. A good option,” says Bala.

With the sharp recovery in credit growth, banking and financial services is another sector which they think looks attractive, though it has to be seen in the context of which lending segment the portfolio is exposed to.

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The financial advisors we spoke to suggested limiting investments in such funds to 5-10% of one’s equity portfolio.

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