A rising stock market attracts a particular type of investor who makes investments at peak levels and then sits on massive losses when there is a correction. Therefore, trying to time the market while investing in sector funds can be fatal for investors.
The IT sector funds are the most recent example. Investors flocked to these funds when they were hot, but are now panicking due to their underperformance.
The rise
Right after the market crash in March 2020, the IT sector had bounced back in style, becoming one of the top-performing sectors in India. The IT index grew from 12,843 points in March 2020 to 24,248 points in December 2020 - almost double in nine months! As a result, investors poured Rs 3,304 crore in IT funds.
The golden run extended to 2021, coinciding with a staggering investment of Rs 11,234 crore into IT funds.
The fall
But the good times came to a halt this year.
After generating returns of 60.05 per cent and 58.45 per cent in 2020 and 2021, the IT index turned red, falling 26 per cent so far this year.
The change in fortunes sparked panic among opportunist investors. Between July and August, investors withdrew around Rs 500 crore from IT funds. And those who haven't are sweating heavily. The near-term forecast doesn't help either, with news of the US slowdown and Ukraine-Russia war breathing down on their necks.
Your takeaway
- This shows that to derive benefits from sector funds, one needs to time their entry and exit, which is almost impossible to do on a consistent basis in the long run.
- Such opportunism can also impact overall returns, as a sectoral fund's returns may be higher than what investors actually make. Frequent changing of funds or skipping/stopping SIPs can actually widen the difference between a fund's overall returns and the actual returns made by an investor.
- Don't follow short-term market trends. Sure, IT sector funds have struggled this year, but their long-term returns have been positive. In the last 10 years, these funds have given an average return of 18.67 per cent.
Our view
At Value Research, we believe avoiding sectoral funds in your portfolio is better. Instead, it would help if you focused on investing in diversified equity mutual funds, leaving the decision of entering and exiting a particular sector to the fund manager.
In any case, a diversified equity fund or a flexi-cap fund already has high exposure to IT sector stocks. Therefore, investing in an IT-specific fund is rather pointless.
Alternatively, if you are seriously looking to diversify further, you can invest in international funds like Nasdaq 100 ETFs. Such funds allow you to invest in some of the world's best technology funds, like Apple, Microsoft, and other such bigwigs.
Suggested watch: Right time to bet on tech funds?
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