Rely on sector funds during stock market non-performance

Fund	NAV (as on Mar 13, 2013)	Annualized Returns (%)
SBI FMCG (D)	49.178	27.4
Reliance Pharma (G)	65.869	24.8
ICICI Prudential FMCG (G)	103.64	17.8
UTI Pharma & Healthcare (G)	45.962	16.7
ICICI Prudential Discovery Inst I	25.23	17
Reliance Banking (G)	110.541	15.6
Franklin Infotech (G)	71.298	15.5
ICICI Prudential Discovery (G)	55.39	15.7
UTI Transportation and Logistics (G)	30.247	15.3
Birla Sun Life MNC (G)	240.97	15.2

 

 

 

 

 

 

 

 

 

 

 

 

The data above shows that out of ten top performing equity funds, seven funds are sector funds. This data shows that sector funds do well when market is gloomy and does not do well. When going gets tough, sector funds get going.  Why does this happen? There are various reasons for this:

Market may be down, but some sectors always perform as products offered by them are need driven:  If you look at the funds above, they have given compounded annual returns ranging from 14.5% to 26.16% over a period of last five years. During the same phase, the Sensex has failed to generate cross it’s all time high level of 21200 odd touched in 2008. Among the sector funds, FMCG, banking and pharma are three sectors which have done well inspite of market not doing well in general. It is very evident that the demand for pharma, FMCG and banking products does not fall even during the crisis period. So these sectors have done extremely well as demand for these products have always been strong.

A combination of sector funds creates a well diversified fund:  Rather than investing in a well diversified equity fund, it is better to invest in a combination of sector funds during the crisis. This will anyway create a relatively diversified fund which can take care of limitations of single sector fund. Check out for sectors which are going to remain relatively immune from crisis and invest in sector funds on these sectors. The sectors selected during each crisis period may not be the same and hence this needs investigation and research.

Sector funds need not be abhorred because some experts treat them as risky. A right selection and combination of sector funds may be more effective than well diversified equity funds during crisis.