How to pick sectoral and thematic funds: Key things you need to keep in mind while investing in mutual funds
Don’t go by past returns
Our cover story explains why investing on the basis of past returns is not a good idea. This is especially true in case of sectoral and thematic funds. Sectors and themes tend to be cyclical in nature, and the performance depends on a host of factors, including news developments, economic conditions, global trends, government policies and market sentiments. For instance, the pharma sector was the top performer after the Covid outbreak in 2020, but it was the worst performer in 2021 and gave negative returns the next year. “That’s how cyclicality plays out,” says Chirag Muni, Executive Director, Anand Rathi Wealth.
To navigate these cycles, investors must keep their ears close to the ground. For instance, government policies can change a sector’s fortunes. After the government announced in 2020 its plans to spend Rs.100 lakh crore on infrastructure over the next five years, infra stocks took off. The infrastructure category gave more than 50% return in 2021. It lost some steam in 2022, but powered ahead in the following years.
Concentrated exposure,high volatility
At the same time, sectoral and thematic funds are more volatile because they have a concentrated exposure to one sector or theme, unlike a diversified fund that spreads the risk thin across several sectors. Since the universe is narrow and there are only a few stocks to invest in, the top 4-5 stocks in a sector or thematic fund account for a significant portion of the portfolio. A downturn in one or two holdings can impact the
