There’s a lot of data indicating investor interest towards a lot of thematic and sectoral funds, especially the ones which might get a boost after the election results and when the Budget comes up where we might be seeing a new policy framework or certain thrust in certain sectors. The data is showing increasing interest in sector thematic funds. Is it a one-off because of the election mode that we are in or are we also looking at a mature investor who feels diversifying towards thematic or sectoral funds is the right way to go after having the right core portfolio?
Hemant Rustagi: I think there are different reasons why investors usually invest in sectoral thematic funds. I mean, if you look at the current scenario, we have had a good run in the stock market and typically what happens when the markets are doing well is that these categories of fund, the sector fund and thematic fund, they tend to do very well so have some other segments of the market like mid and smallcap. Typically when investors are looking at the past or recent performances, they look at the fund which is at the top of the chart and obviously the sector and thematic funds are right up there. Obviously, these sectors that do well keep on changing depending on where the government is focusing. For example, currently we have seen a good run in defence funds, we look at PSU equity funds, power and infrastructure funds. These are the sectors that the government has been focusing on and that is where investors have been putting in their money. So, yes, there is a particular time in the market when you will see a lot of interest from the investors in both sectoral as well as thematic funds.
We have also seen a lot of theme based NFOs launching. We have seen a manufacturing NFO coming. We have also seen defence related NFOs coming. A lot of sector specific interest is being seen from the AMC side. What is the general trend in terms of sector allocation and thematic themes that you are seeing among investors?
Hemant Rustagi: One of the key factors when you start looking at a sector or thematic fund is not to look at only the past performance. Obviously, you need to see going forward which are the themes, which are the sectors that are likely to do well. Some of these themes or sectors that I mentioned about, is where the government has been focusing. The key factor is that if we see the same government coming back once the election results are announced, the expectation is that their focus on these sectors and themes will continue. So, why past performance to look at because in the sector and thematic fund, the entry and exit timing is very, very important. You cannot be just looking at the past performance. You need to be very clear in terms of what kind of runway these sectors or these themes have going forward, then only you can do it. It is very important for investors to realise that when you are thinking of investing in a sector or thematic fund, you need to look at where the growth is going to be and, of course, there are a couple of other factors that investors need to remember. If you are a new investor, if you just started investing, do not just look at the performance, understand the attendant risk of investing in these categories of funds. So, my recommendation always is that it is only those investors who have experience, who understand equity, who understand what are the risks related to these funds, should be looking at it and also, only a small portion of the portfolio should be invested.
Also, you should be investing in these funds through SIP. Unless and until you expect that the sector or theme that you are choosing has a long runway of growth, otherwise the entry and exit is very, very important. So, if you are going to be doing SIP over the next one year and if this growth phase is going to last for less than a couple of years, you would not even have enough time to allow your money to grow. These are some of the important things that investors should remember while taking a plunge into these funds.
We are talking about a concentrated exposure in a particular sector, in a particular theme. But the themes and sectors that we are talking about are not something that investors would not be exposed to in their other funds. For example, we talk about a manufacturing theme. Investors might see these kinds of stocks in maybe a largecap or a flexicap because fund managers might definitely want to make the most out of these themes which might be running in the future or at least having a growth perspective. So, how can an investor ensure that there is no case of over diversification in that particular sector in any of the existing categories of funds?
Hemant Rustagi: Yes, if you as an investor are able to spot that there are certain sectors or themes that are likely to do well and you seem interested in investing in them, there is no reason why a professional fund manager who is back with a team of researchers will not be aware of it. So, yes, absolutely, you are right that many of these diversified funds, whether it be a flexicap fund or large and mid or multicap will certainly have exposure if they see a long runway of growth, like I mentioned earlier.
Unfortunately, what happens is as an investor, when you are looking at performance because these funds have concentrated bets and if these themes or sectors have been doing well, they will be, like I mentioned earlier, at the top of the chart. So, obviously, you get impressed with that and you feel that I must take exposure in these.
In the diversified portfolio, even if these sectors or themes exist, it would not be visible to you because they may be holding 5% or 10% or maybe 12-15% overall in terms of allocation. So, many times, the investors cannot see how these sectors or themes are contributed to the returns that have been generated by diversified funds, so that is the reason why you see that the sector and thematic fund always are fancied by investors.
But yes, your point is absolutely valid and that is what every investor should do, that once you make up your mind that, okay, this is the sector and this is the theme I am looking at for investing, apart from certain things that I mentioned earlier, obviously, you need to look at what kind of growth it is going to be there, how much exposure you have, one of the important aspects that you need to look at is how much exposure you already have to this sector or a theme that you are looking to invest in.
I think this kind of information is very easy to find. I mean, if you are working with a distributor or there are many portals that, if you put your fund holdings, you can find out as to what kind of sector or stock exposure you have. So, it is absolutely important that before you think of investing or you make a decision to invest in these themes of the sector, you must analyse the exposure which you already have through the diversified funds.
How can one time their entry and exit in the sector and thematic exposure?
Hemant Rustagi: This can be very tricky. Like I mentioned earlier, when you are investing in sector or thematic fund, the entry and exit time is very, very important. As an investor, even if you think that you understand the potential this sector or the theme has and if you feel that there is a long runway of growth over there, there can be many factors that can make a difference. For example, if the government has a certain policy supporting a certain theme or a sector, if there is a change in that and if you are not someone who is really keeping track of happenings around those sectors and themes, it can be very, very difficult for you to time your exit.
While entry is very easy, because you can enter whenever you feel like, because you are in the midst of that growth phase, exit obviously is equally important, so that is exactly the reason why I said earlier that investors need to be very careful. For example, if we talk about say the IT sector, there have been a feeling for the last few quarters that you are going to see a rate cut from the Fed. Now, obviously, they are finding it difficult to control inflation. So, that is getting postponed and there are talks of even whether this will happen in the current year or not.
So, if you are taking a bet in the IT sector, you should have the capacity to hold this investment for a longer period and also go through periods of underperformance or poor performance or negative performance. So, it becomes a bit tricky for a common investor to do that, that is exactly the reason why it is always said that if you are looking at a theme or a sector, your fund manager, if the fund has been doing consistently well above the average of the peer group, you will certainly have exposure to that. Do not try to do it yourself because that can be pretty risky.
What is the kind of fund you think investors should be picking up, after having the basic core portfolio ready and in place?
Hemant Rustagi: In the current circumstances, assuming that you are going to see the same government after the election, it is obviously one big thing that we need to keep track of. If that happens, like we mentioned about certain sectoral themes, defence is definitely there. Manufacturing, infrastructure if you look at the funds per se,
I would say Nippon India Infra and Power Fund. In the infrastructure, I would say one can look at Bandhan Infrastructure Fund and then in the PSU, ABSL PSU Fund and there is the Franklin India Opportunities Fund. I like that fund and I think that has a broad-based theme of where you are going to see the potential of growth. Then pharma, again, in terms of valuations, in terms of expectation of growth, so ICICI Pru Pharma Healthcare and Diagnostics Fund. So, these are some of the funds one can look at.
