The core of a portfolio should comprise of diversified funds and have a limited allocation to sectoral funds...
29-Apr-2013 •Research Desk
I have selected few funds by following a certain method. I created a list of funds which gave best returns over six months, one year, two years, three years and five years. Then I chose funds common to all four lists. These funds are, SBI FMCG-D, SBI Pharma- G, ICICI Pru FMCG Reg- G, BSL International Equity A- G.
I invested in these funds six-months back for a total of 12 SIPs. At the same time, I invested in Reliance Media & Entertainment-G and SBI Emerging Businesses-G fund for 12 SIPs.
Are all my investments good? If not, please explain why I should discontinue investing in any of the above funds. Which other funds are good for investment? I want to generate big returns from my mutual fund investments after five years. After the present 12 SIPs I wish to retain the investment for five years and then shift to bank fixed deposits.
- Manoj Kumar R
It is not surprising that sector funds like FMCG and Pharma are topping the return charts over different time periods. The stocks in this sector have delivered more than others in the recent past, which has led to a good performance over different time periods.
But while selecting a fund, one should also look at the year-end returns of the funds for at least three to five years along with the trailing returns. Annual returns of the funds tell how consistently a fund has delivered.
If we do a year-on-year analysis of equity funds, we will find that every year sectoral funds have topped the return charts but the top performing sector is different each year. It becomes obvious that one sector will outperform the other and same sector can’t remain on top for long. For instance, banking sector funds were on top last year (2012), while they were in the bottom 25 per cent per cent in 2011. Similarly, IT funds were least hit in 2011, but when markets picked up in 2012, they were among the worst performers.
The following table shows how the different indices representing the sector have changed positions on a year-on-year basis.
This explains the volatile nature of sectoral or thematic funds and strengthens our principle that the core of any portfolio should comprise of diversified funds. Thematic funds should only play a supportive role in it and allocation to the same should be limited to 10-15 per cent.
Your portfolio consists of four sectoral funds, a mid-cap fund and one international fund. You should exit all the sectoral funds and invest in three to four diversified funds. International funds are good for geographic diversification but exposure should also be limited.