{"id":30344,"date":"2024-09-04T17:00:00","date_gmt":"2024-09-04T11:30:00","guid":{"rendered":"https:\/\/www.fundsindia.com\/blog\/?p=30344"},"modified":"2024-12-10T17:37:24","modified_gmt":"2024-12-10T12:07:24","slug":"should-you-consider-thematic-sector-funds-for-your-portfolio","status":"publish","type":"post","link":"https:\/\/www.fundsindia.com\/blog\/mf-research\/should-you-consider-thematic-sector-funds-for-your-portfolio\/30344","title":{"rendered":"Should You Consider Thematic And Sector Funds for Your Portfolio?"},"content":{"rendered":"\n
\"\"<\/a><\/figure><\/div>\n\n\n\n

Sector and Thematic funds are becoming popular\u2026<\/span><\/strong><\/h4>\n\n\n\n

Over the past 12 months<\/strong>, more than 1\/3rd <\/strong>of equity mutual fund net inflows<\/strong> have gone into sector and thematic funds<\/strong>. <\/p>\n\n\n\n

It\u2019s now the largest equity category (three years ago <\/strong>it was ranked 5th)<\/strong>.<\/p>\n\n\n\n

\"\"<\/a><\/figure><\/div>\n\n\n\n

..Led by strong recent returns<\/span><\/strong><\/h4>\n\n\n\n

Several sector and thematic funds have delivered high returns<\/strong> in the recent past leading to a strong interest in these funds.\u00a0<\/p>\n\n\n\n

This has also resulted in a lot<\/strong> of new Sector and Thematic NFOs <\/strong>being launched by different AMCs.\u00a0<\/p>\n\n\n\n

All this leads to a simple question:  <\/p>\n\n\n\n

Should You Consider Thematic And Sector Funds for Your Portfolio?<\/strong>\u00a0<\/span><\/h4>\n\n\n\n

Let\u2019s find out…<\/p>\n\n\n\n

If you are evaluating sector and thematic funds, there are five challenges<\/strong> to be addressed<\/p>\n\n\n\n

CHALLENGE 1: PERFORMANCE IS CYCLICAL<\/span><\/strong><\/h3>\n\n\n\n

Assume you had to invest in any sector or thematic fund today, which fund would you choose?<\/p>\n\n\n\n

The intuitive preference would be to go with the top-performing funds of the last few years. You run a screener, sort sector and thematic funds from highest to lowest 1-year or 3-year returns, and find out the current top funds with the highest returns. Simple right?<\/p>\n\n\n\n

But here is where things get a little counter-intuitive. <\/p>\n\n\n\n

For the last 29+ years, we evaluated the historical rolling return trend (1Y and 3Y) of popular sectors and themes vs broader index Nifty 500 TRI. In the tables below, the periods of outperformance are shown in green and underperformance in red.<\/p>\n\n\n\n

1-Year Rolling Returns (CAGR) Outperformance of Sector\/Themes vs Nifty 500 TRI<\/strong><\/p>\n\n\n\n

\"\"<\/a><\/figure>\n\n\n\n

3-Year Rolling Returns (CAGR) Outperformance of Sector\/Themes vs Nifty 500 TRI<\/strong><\/p>\n\n\n\n

\"\"<\/a><\/figure><\/div>\n\n\n\n

As you can see from both the 1Y and 3Y tables, sectors and themes do not outperform the Nifty 500 TRI during all periods. <\/p>\n\n\n\n

For every sector and theme, phases of outperformance are inevitably followed by phases of underperformance. <\/strong><\/p>\n\n\n\n

The key takeaway for us is- Performance of sectors and themes are cyclical. <\/strong><\/p>\n\n\n\n

This happens because most sectors are cyclical and are sensitive to the changes in the business and economic cycle.<\/p>\n\n\n\n

So, if you base your decisions solely on past performance, then you will most likely enter the sector\/theme which has had strong outperformance and exit the sectors with underperformance. <\/p>\n\n\n\n

Here is where you can go wrong, <\/p>\n\n\n\n