Are sector rotation funds the answer to risks of sector downturns?

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Subscribe to enjoy similar stories. There are currently more than 180 sectoral or thematic mutual funds in India, up three times in ten years. Their contribution in this financial year to total net equity inflows has touched nearly 50%, up from about 16% in FY 2022.

These numbers reflect the rising investor interest in sectoral themes, with mutual funds catering to this need with a spate of new fund offers. However, in the dynamic world of investing, one thing is constant - market sectors are never static. They rise and fall, driven by evolving macro-economic conditions, policy environment, consumption patterns and global trends.

For investors, these sectoral shifts can be a double-edged sword—while certain industries may thrive, others can face sudden downturns, leaving portfolios exposed to risk. Behavioural biases often drive investors to enter sectors when trends are favourable, but inertia can lead them to stay invested even as conditions change, ultimately affecting their returns. And if they happen to enter at the peak, they often get caught in sector traps with negative returns till the sector cycle reverses.

Also read: Unable to get an Ayushman Vaya Vandana Card? Here’s a step-by-step guide. As market dynamics continue to evolve, the need for a more adaptable investment strategy has become increasingly apparent. Sector rotation is one such investment strategy that represents a forward-thinking approach, enabling investors to diversify their portfolios across various sectors while actively reallocating assets in response to market trends. This flexibility not only helps mitigate the risks associated with sector-specific downturns but also positions investors to capitalise on emerging opportunities.