How mutual funds offer flexibility of playing investment themes

The USP of thematic funds is that if a sector or theme seems promising, or is in vogue, and the fund supervisor has a confirmed observe file, the possibilities of making outsized positive factors are fairly excessive. At the identical time, additionally it is concerning the investor’s conviction within the concept (sector) and the fund supervisor. In a method, this can be a concentrated guess, as it’s a few explicit investment theme, despite the fact that the fund could also be well-diversified in phrases of quantity of shares.

However, on the finish of the day, the guess could or could not play out, relying on how the sector or theme performs. Also, the position of the fund supervisor is restricted by the scope of investment.

It is because of these components that the efficiency of sectoral or thematic funds is extra dispersed in comparison with different fund classes.

Let us take a look at some efficiency knowledge.

As of December 24, 2020, a basket of 27 giant cap funds (common possibility) delivered a median five-year return of 10.8 per cent, with the best-performing fund delivering 14.9 per cent and the worst-performing being at 6.6 per cent. In impact, the vary between the best- and the worst-performing funds is between 14.9 per cent and 6.6 per cent.

Now, evaluating this with a various basket of 67 sectoral or thematic funds, the five-year return until December 24, 2020 confirmed a median of 9.5 per cent (slightly decrease than the typical of large-cap basket). The best-performing fund right here generated a return of 18.7 per cent, and the worst-performing one logged a damaging return of 2.9 per cent. So, the efficiency vary right here is between 18.7 per cent (greater than giant cap) and damaging 2.9 per cent (a lot decrease than 6.6 per cent).

Some could argue that the comparability of thematic funds with large-cap funds isn’t truthful. In that case, as an alternative of giant caps, allow us to take into account multi-cap funds.

Till December 24, 2020, the five-year common return from a basket of multi-cap funds confirmed a median of 10.8 per cent (just like giant cap), the best-performing fund generated 14.9 per cent (once more just like giant cap) and the worst-performing fund generated 5.6 per cent (slightly decrease than giant cap). Here additionally, the five-year efficiency vary is between 14.9 per cent and 5.6 per cent, whereas in case of thematic funds, the efficiency vary is between 18.7 per cent and damaging 2.9 per cent. Such extensive disparity in efficiency is one of the unwanted side effects of playing a specific sector or theme.

If we check out the best- and the worst-performing thematic funds for clues as to which concept has carried out effectively, there too the dispersion is excessive. Over a five-year interval, the 5 best-performing thematic funds are Aditya Birla Sun Life Digital India Fund (CAGR 18.7 per cent), ICICI Prudential Technology Fund (18.6 per cent), SBI Banking & Financial Services Fund (17.6 per cent), Nippon India US Equity Opportunities Fund (16.7 per cent) and ICICI Prudential US Bluechip Equity (16.2 per cent). The theme right here ranges from IT to monetary companies to US equities.

In the identical interval, the concepts that didn’t work embrace HDFC Infrastructure Fund (CAGR of minus 2.9 per cent), HSBC Infrastructure Equity Fund (minus 1.3 per cent), SBI PSU Fund (0.6 per cent), UTI Transportation and Logistics Fund (3.3 per cent) and Canara Robeco Infrastructure Fund (4.7 per cent). In hindsight, the infrastructure or PSU themes didn’t play out during the last 5 years, however whether or not the identical might be true over the following 5 years is anyone’s name.

Given this backdrop, it’s going to assist if in a thematic fund, the fund supervisor is given the flexibility to play on concepts that are model-driven coupled with judgement. Currently, ICICI Prudential Business Cycle Fund presents such an concept for which the NFO is presently underway. This fund has the flexibility to take a position throughout market caps, themes and sectors, thereby giving the fund supervisor a large canvas.

Here, the fund supervisor might be figuring out themes and sectors based mostly on a prevailing enterprise cycle (progress, recession, restoration and so on.). During a specific part, say progress or restoration, sure sectors are inclined to do effectively, and this fund can go obese on these sectors. The universe being Nifty 500, the portfolio could be evenly unfold throughout say 4-6 sectors, or could be concentrated to 2-3 sectors, based mostly on alerts as per the enterprise cycle mannequin. The idea is in a method just like that of BAF funds, the place you don’t have to fret concerning the allocation to fairness and debt. The investor is relieved from making the choice to toggle between asset courses and taxation points.

The different path to play the market theme is thru the index funds or index ETFs of sure sectors. The vital level to recollect right here is the onus of rejigging the sectors will rely upon the investor, whereas within the fund talked about above, the fund supervisor will do the needful for the investor. The different moot level of distinction one needs to be cognizant about is that index composition will get revised periodically, each in phrases of constituents and floating-stock weightage, which varies as per costs. This is a reactive course of because the revision relies on the previous information. For a forward-looking play, the optimum nonetheless is to take a position via typical mutual funds.

(The creator is coach, creator, columnist, wiseinvestor.in. Views are his personal)