Diversify investments to generate alpha: Use sectoral funds as long-term tactical plays to manage risks

financialexpress.com:

Sectoral funds have become popular due to their potential for delivering higher returns, especially during bull markets. But investors must keep in mind that these funds are not for short-term bets and they should invest in them through systematic investment plans (SIP) with a five- to seven-year horizon.

In February, out of Rs 26,866 crore net inflows in equity-oriented funds, sectoral funds reported net inflows of Rs 11,263 crore. Of this, asset management companies raised Rs 7,178 crore from five new funds. Interestingly, sectoral funds have reported the lowest redemption percentage as compared with other equity-related funds in the month, indicating a more stable investor sentiment.

The sectors showing promise for sustained growth and higher returns are those aligned with the capital expenditure cycle and the government initiatives on infrastructure spending. Sectors such as auto, realty, and capital goods look promising for the long term, despite certain areas of the market having high valuations.

Nirav Karkera, head, Research, Fisdom, says the appeal of sectoral funds lies in their ability to capitalise on specific themes that are expected to outperform the broader market. “In bull markets, investors often seek opportunities to enhance their returns by focusing on sectors with strong growth prospects or favour-able market conditions,” he says.

Sectoral thematic funds should be considered as part of the satellite portfolio rather than the core allocation. A satellite portfolio consists of tactical plays such as investing in specific themes. So, investing in these funds can be beneficial for those seeking to diversify their investments and generate alpha.

Abhishek Banerjee, founder & CEO, Lotusdew Wealth & Investment