Sectoral and thematic mutual funds can deliver solid performances during broader market rallies. Given the smart market rally across segments in the last one year, these sectors and themes have played out well, thus helping equity funds focused on them.
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Technology funds delivered a healthy 84 percent return, as a category on an average, over the last one year, according to data from Valueresearch. The stocks of information technology and software services companies have been on fire, thanks to their sound financials. The adoption of digital modes of transactions globally, especially during the pandemic, has helped these firms. The best technology mutual fund delivered in excess of 100 percent in the last one year.
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Following the thrust given in the Union Budget of 2021, the infrastructure sector rallied. Funds focused on the segment delivered 69 percent in the last one year. It also helped that stocks in the segment were available at attractive valuations after years of underperformance.
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Funds focused on the natural resources and energy theme come next in the list of schemes that fared quite well in the last one year. This fund category delivered 72.5 percent returns in the last one year. The rally in segments such as metals, utilities and petroleum products, and other commodities in anticipation of an economic revival resulted in gains for funds focused on the theme.
After being in the sidelines of market rallies over the past several years, banking and financial services companies participated in the bull run from March 2020. Funds based on the theme delivered 61 percent in the last one year. With even large banks still not yet out of the woods on the non-performing assets front, it remains to be seen if the rally sustains.
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Dividend yield funds, too, did reasonably well and recorded 55 percent returns in the last one year as a category. Unlike other sectoral and thematic funds, these schemes are fairly diversified. Of course, sectors that pay relatively higher dividends such as IT, FMCG, energy, metals and auto figure prominently in the portfolios of these schemes.
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Most sectors and themes are cyclical in nature and hence returns could be lumpy. Timing of entry and exit becomes crucial to ride sharp rallies. Most retail investors may be better off with regular diversified equity funds that invest across market caps. These funds would anyway invest a part of their portfolio in themes and sectors that are in favor.
