INSUBCONTINENT EXCLUSIVE:
ByDhirendra Kumar, CEO, Value ResearchThe lure of investing in whatever sector or industry is doing well at the moment is easy to pass off
Professionals (brokers and advisors) as well as individual investors can always justify investing in an industry by pointing out that it was
doing better than others, the assumption being that it will continue to do better
It happened to tech stocks back in the heady days of 1999 and we all know how that ended
Around 2005-07, it happened to a set of industries that were loosely (forcibly) defined as infrastructure
That ended up in just as big a blowup as tech in 2001.
More recently, in a sort of a slow motion, this has started happened to investments
in the pharmaceuticals industry
For long, pharma had built up a reputation as an all-weather star, which would keep delivering for investors not matter what was happening
In the seven years from 2009 to 2015 (inclusive), pharma funds delivered an average of 35.4% p.a., amazing returns that multiplied
wrong with the Indian pharma industry and when and how it will get fixed
My brief is to point out why, for mutual fund investors, it does not ever make sense to invest in sectoral funds
You see, at any point of time, some sector or the other is doing better than the markets in general
The equity market, on the whole, is the average of all its components
be better than average and some worse
Sometimes, this gap will be large and sometimes it will be small
Sometimes it will be short-lived and sometimes it will sustain for months or even years.
When a sector sustains better than average
performance for a noticeable amount of time, then a bandwagon gets created around it
Fund companies launch sectoral funds, or start pushing the ones that already existed
Investment advisors start talking about it, seeing a clear shortterm win if the trend holds
For a while, the trend does hold
At this point it looks sub-optimal to invest in a diversified way
The thing to understand is that this is always happening
Since some sector or the other is always certain to be doing better than the average, having a diversified portfolio always looks like a
foolish choice.
And then, inevitably, the averages assert themselves and the sector starts performing below average, and the returns revert
Those who joined the party late are left with a negative outcome.In fact, the reversion to mean often results in the formerly best sector to
fall to the absolute bottom, and create losses even when the rest of the market is booming
This is something that former cheerleaders of the tech, infra and many other sectors have learnt through painful experience.
So does that
The simple answer is that investors should let the investment manager of a diversified equity fund make the choice
After all, the main reason for investing in mutual funds is to get the services of an investment manager who does the research and makes the
