Thematic & sector funds are all the rage. But recent returns mask the true risk.

livemint.com:

How to buy a 3-bedroom apartment at 2 BHK prices: Secrets of stressed properties Chasing returns: Any classic book on investing would advise you to buy low and sell high, but that’s easier said than done. There’s a pitch for a ‘defence scheme’ that says the Nifty Defence Index delivered a 206% return in the past 12 months. The eye-popping return makes for good marketing material, but investing in a theme or sector that has done well over the past three to five years is risky, as it’s probably time for the cycle to turn.

A look at the past 10 years of data (WhiteOak's data from 2014 onwards, for instance) shows there have been different winners and losers almost every year as far as themes and sectors are concerned. That's not to say the buy-high-and-sell-higher strategy never works, but asset management companies will more often than not try to sell you something that has already done well in the recent past. Churn attracts tax: In a sectoral or thematic fund, the investor has to decide on his own (or with his advisor) when to enter and exit a sector or theme.

That’s a difficult task. Fund managers are best equipped to judge this since it’s their full-time job. But even if you manage to pull it off, you still need to sell your holdings and move to a different fund.

“When you do this, you have to pay tax," said Rukun Tarachandani, co-fund manager at PPFAS Mutual Fund. In this year’s Union Budget, the long-term capital gains tax was increased from 10% to 12.5% and the short-term capital gains tax from 15% to 20%, making mistakes and churn costlier. Also read: Why this Singapore-based couple retains their Indian health insurance plan Cost of being wrong: Data from FundsIndia shows that 11 sectoral and thematic indices