Insights

Don’t actively manage your fund portfolio based on market themes

June 19, 2017 . Mutual Fund Research Desk

‘Markets seem to be breaking past highs. Should I move out of equity? My fund has too many NBFC stocks. Should I change my fund?’ These are some of the questions that investors often ask. Then there are those investors keeping track of the market and demanding funds that invest in the sector they think are going to do well. So before you go down that path, know that trying to manage your fund portfolio actively based on every single event or opportunity will not leave your investments in good shape. Keep these points in mind before you start a mutual fund investment.

You have a fund manager running your fund
If you invest in a mutual fund, you agree to let the fund manager do stock picking and managing them. nfoThis is the very purpose of investing in mutual funds – to let a professional identify and manage stocks on your behalf, freeing you from the hassle of doing it yourself. If you wish to own specific stocks or sectors, you would only have to build your own stock portfolio. When you have an expert doing the job for you, it’s hardly sensible to micromanage your funds.

No funds for every theme
There are theme funds and sector funds but not one for every theme or sector. For instance, a fund with chemicals and fertilizers or defence as a theme would not be available for the simple reason that there are not enough stocks in the listed space to run such a fund.

However, what many theme funds do offer is provide a flavour of such micro themes within a broader play. For instance, ports may be part of an infrastructure or a logistics fund, defence as part of a capital goods and engineering theme and chemicals and fertilizers as part of a consumer theme. Hence, you may need to settle for micro themes by choosing a broader fund.

A diversified fund’s portfolio is not static
Sometimes investors look for diversified funds that have exposure to sectors the way they want it, or hold some micro themes to which they wish to take exposure. This is where it gets tricky. You start looking for a fund that will have highest weight to the theme for which you are looking. You may not find a fund that suits this requirement, or you may pick up a poorly performing one just because it has such desired exposures.

A diversified fund cannot completely ignore key sectors (banking, energy, IT, pharma and so on) that receive maximum weights in the index and instead go overboard on smaller sectors. They go a bit underweight (that is taking slightly lower exposure to the sector than the index) or overweight on the sectors they think are going to underperform or outperform. Ignoring key sectors in favour of smaller sectors may prove to be costly in staying ahead of the index moves.

Besides, even if you do spot a fund with the exposure you seek, remember, the portfolio is subject to change. The fund manager may dynamically manage the portfolio and may rejig it after you invested in the fund. Conversely, the fund may well pick up stake in the sectors you seek in later months if it really does show potential. Hence, to expect a diversified equity fund to provide you with certain thematic exposure is not practical.

If you are that particular about owning some micro themes and are confident in your ability to correctly enter the theme and exit it, you can extend it a little further and own a couple of good stocks in that theme. But this is out of the range of most regular mutual fund investors. Further, always remember, the fund manager is tracking the reforms/changes in the macro environment and their impact on stocks/sectors more than we do, and doing it full-time, assisted by a research team.

Hence, the manager would anyway be tweaking the portfolio to tap into such potential. If this be the case, there may be little point in further trying to manage an expert-managed portfolio! Besides, if the idea of investing in mutual funds is to manage less, then there is little point in sweating it out to identify growth opportunities in the market.

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