Sectoral funds are catching investors' fancy; here is what experts suggest

Sectoral/thematic funds have been topping the equity mutual fund space in terms of the funds mobilised for some time now. In January 2024, the category mobilised Rs 9,380.48 crore, while the net inflow stood at Rs 4804.69 crore. Similarly, the net inflow in the prior month was Rs 6,005.49 crore.

According to AMFI, sectoral funds invest at least 80 per cent of the corpus in stocks of a particular theme or sector. As the exposure in these funds is limited to a particular theme or sector, they are rather riskier. Furthermore, the timing of investment in such funds is crucial, as sectoral performance is cyclical.

What’s driving investor interest in thematic or sectoral schemes?

Deepak Gagrani, the founder of MADHUBAN FINVEST, is of the view that themes that have recently performed well draw high investor interest, typically during the bull market, and such interest prompts fund houses to come up with thematic funds to meet investors' demand.

Rajesh Sinha, Sr. Research Analyst, Bonanza Portfolio, held that in the recent past, sectoral and thematic funds have gained popularity among investors because these funds give better returns in bull markets. During market upswings, investors focus on theme-based investments to outperform the market by focusing on specific themes or sectors.

Should investors add thematic or sectoral funds to their portfolios?

Sinha adds that while sectors or themes like PSU, defence, infrastructure, technologies, etc. have done well in the recent past, they come with bias as these funds are inclined towards one theme or sector, and if anything, untoward happens in that theme, they will start underperforming. "So, we believe that sectoral or thematic funds are suitable only for investors who understand the sector and know the time of entry or exit in such sectors," Sinha adds.

Furthermore, Gagrani pointed out that investors need to acknowledge the fact that maximising the potential of thematic funds requires active engagement in monitoring and rebalancing their portfolios regularly. Passive investing is not suitable for thematic funds.

"As investors, we hold a positive outlook on themes in the Indian economy such as manufacturing, infrastructure, and banking. Additionally, the pharmaceutical sector, emerging from prolonged consolidation, is poised for future growth," Gagrani added.

Top 3 sectoral/ thematic funds that delivered a whopping annualised return of up to 26% per annum

Quant Infrastructure Fund-Direct Plan (G)

This infra-sector-focused fund with a fund size of Rs 1,321.56 crore has a five-star rating by Value Research. The current net asset value (NAV) of the fund as of February 8, 2024, was Rs 40.9877 for the growth option of its direct plan.

Over 10 years, the fund’s annualised return is to the tune of 26.1 per cent, while its trailing returns over other periods are 75.55 per cent (1 year), 47.55 per cent (3 year), 38.49 per cent (5 year), and 20.3 per cent (since launch).

The fund carries an expense ratio of 0.77 per cent.

The top 10 stock holdings of the fund include stocks like Reliance Industries, Jio Financial Services, DLF, LIC, and IRB Infrastructure, among others.

A SIP of Rs 10000 monthly, i.e., a total investment of Rs 12,00,000 across 10 years, is now valued at Rs 52,78,324, resulting in an annualised yield of 27.9 per cent.

The SIP route in the scheme can be taken with a minimum SIP of Rs 1,000, while the minimum lump-sum investment is Rs 5,000.

Franklin Build India Fund - Direct-Growth

Rating agency Crisil has accorded the fund 2 stars, with infrastructure as its theme. The assets under management of the scheme from the house of Franklin Templeton Mutual Fund are to the tune of Rs 1,879 crore. The expense ratio of the fund is 1.06 per cent for the direct plan as of December 31, 2023. The minimum investment required is Rs 5,000, and the minimum additional investment is Rs 1,000. The minimum SIP investment is Rs 500.

Its trailing returns over different periods are 70.25 per cent (1 year), 34.27 per cent (3 years), 26.69 per cent (5 years), 25.57 per cent (10 years) and 0.95 per cent (since launch).

A monthly SIP of Rs 10,000 with a total investment of Rs 12 lakh spread across 10 years will be valued at Rs 40.8 lakh.

The top stocks in the fund’s portfolio are L&T, ONGC, NTPC, PGCIL, ICICI Bank, and KEI Industries, among others.

Invesco India PSU Equity Fund-Direct Plan-Growth

From the stable of Inveso Mutual Fund, this PSU-focused fund has an asset size of Rs 776 crore as of January 31, 2024. The expense ratio of the fund is 1.06 per cent for the direct plan as of December 31, 2023. The minimum investment required is Rs 1,000, and the minimum additional investment is Rs 1,000. The minimum SIP investment is Rs 500.

Its trailing returns over different periods are 89.13 per cent (1 year), 40.86 per cent (3 years), 30.01 per cent (5 years), 22.61 per cent (10 years) and 0.95 per cent (since launch).

A monthly SIP of Rs 10,000 with a total investment of Rs 12 lakh spread across 10 years will be valued at Rs 40.54 lakhs.

The top stocks in the fund’s portfolio are NTPC, Bharat Electronics, Coal India, SBI, and Hindustan Aeronautics Limited, among others.