Hello Readers! 

Recently if you would have gone through the performance of various mutual fund category schemes, you might have noticed that the two category funds that were on focus, that is Value Mutual Funds and Sectoral mutual funds! 

In the last 1 year, the Schemes of Value mutual fund category has given impressive returns of around 25-35% and this was attractive towards investors because this much returns came after the 6-month long odd performance.

The second focus funds are from the Focused Sectoral Mutual fund category. These category funds especially the technology and pharma categories sectoral funds have given 45-55% returns in the last year.

These funds have explicitly given high returns in the last year, despite that, they are the least recommended fund to invest in for the long-term, by experts. The reason behind this is the cyclicality of returns and the importance of timing. If you get these wrong, you can even end up losing a lot of money.

Let us understand it in detail!!

VALUE AND CONTRA FUNDS.

The portfolio of both of these category funds is comprised of stocks from that part of the market that most of the time remain unnoticed. That means a large portion of the portfolio of these funds is stocks that are traded at a price below their calculated intrinsic value. Some kind of similar story with the Contra category funds also. It is simple a category fund with its name changed but follows the same strategy that value fund follows. They also have their portfolios allocated in stocks that are turning around.

Understand why these funds are neglected?

If we see the data of the last 2-3 years, we will be found that investors focused more on growth stocks, and thus again the stock picked up by value and contra funds got neglected and ultimately these funds underperformed. However, in the last few months, investors shifted their focus from growth to the underpriced section of the market, which resulted in a boom in returns from value and contra funds.

Well, these funds have given many good returns in last year that can cover up the underperformance of these funds from long-time…but…but...if you are planning to invest in these funds, ignoring the fact will be worthless.

If we take out the last 10-year calendar, then you must not be shocked to know that the value category, on the whole, has underperformed the S&P BSE 100 in four of the last 10 calendar years; 2018-2020 was one such phase.

To attract the investors’ attention toward value mutual funds, the manager of these funds has added growth-oriented stocks to the portfolio of these funds, which means now the value of Value category funds has expanded.

So, now is it good to invest for the long-term in these funds? Well, it's tough to say that because even after the addition of stocks with high earnings visibility, growth, and high valuation, these funds will be categorized as value mutual funds. The reason behind this is because still, their current market price is below intrinsic value.

SECTOR AND THEMATIC FUNDS.

Sectoral funds and thematic funds follow a strategy of investing in only one kind of sector. There are at least 11 sectors in which these funds concentrate their investment. And the prominent difficulty of investing in these funds for the long-term is that none of the 11 sectors continue to outperform in the long-term.

Currently, two sectors are proving themselves, winner, they are technology and pharmaceutical, and we are very well known with the reasons behind this. But tell me one thing in the coming time when the world will get rid of the corona, will then also these funds will out-perform like this?

Most sector-based themes are cyclical in nature. They are subject to fluctuating business fortunes and/or the macroeconomic environment. Timing of entry and exit becomes critical.

Experts advise before you plan to invest in sectoral funds, do fix the amount you want to invest and your entry and exit time, but we all know how difficult it is to time the market accurately. For example, the government says that in the last few months energy and PSU sector funds had gained significantly, in the last six months these funds have given an average return of 20%. But if we look at the last three-year data, it is shocking as the return from these funds are either negative or in single digits.

One can easily say that the sectoral funds are not suitable for long-term investment, as it becomes too risky. Also, the exposure of the portfolio of these funds might be more in stocks that can cause unexpected volatility.

So basically, focusing on these category funds if you are planning to invest for the long-term is worthless and at the same time too risky, as the volatility associated with these funds won't help you reach out your goals.

That is why investors focusing on long-term investment are still advised, choose to invest in regular diversified equity portfolios that aren’t bound by restrictive mandates.

Keep reading for more updates on Mutual Fund Investment!!

For any kind of query you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.

Happy Investing!

(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).