Recent market turbulence has caused a sharp decline in the performance of several mutual funds, especially sectoral and thematic funds. Many investors who put their money into these funds—whether during New Fund Offers (NFOs) or afterward—are now facing losses as net asset values (NAVs) have dropped significantly. If you are in this position, here’s how to navigate the situation wisely.
Understanding the Impact on Sectoral and Thematic Funds
Sectoral and thematic funds focus on specific industries or investment themes, making them highly sensitive to market conditions. Recent heavy selling by foreign institutional investors (FIIs) and sector-specific downturns have led to notable declines in these funds:
- Defense Index: Down by 10.25%
- PSU Index: Dropped by 11.7%
- Metal Index: Decreased by 12.28%
Additionally, the broader indices—Nifty 50, Nifty Midcap 150, and Nifty Smallcap 250—also recorded declines of over 9-10%. These factors have significantly impacted sectoral and thematic funds, some of which have fallen 10-20% below their NFO price.
Why Timing Matters in Sectoral and Thematic Funds
Many of these funds were launched when their sectors were already at their peak, attracting investors with promises of high returns. However, investing during a peak often leads to losses when markets correct.
For example, the defense and PSU sectors delivered over 100% returns in the year prior to some fund launches, making them highly appealing. When market corrections occurred, these funds faced steep declines due to their narrow focus and limited diversification.
Steps Investors Should Take
1. Assess Your Portfolio
Investors should take this opportunity to review their portfolios. If a significant portion of your investments is in sectoral or thematic funds, consider reallocating to diversified equity funds. Diversified funds invest across multiple sectors, spreading risk and offering more stable returns over the long term.
2. Consider Switching to Diversified Funds
Unlike thematic funds, diversified funds like multi-cap or flexi-cap funds provide broader exposure to different industries. They are ideal for new or less experienced investors who want consistent growth without excessive risk.
3. Limit Exposure to Sectoral Funds
Experts recommend allocating no more than 10% of your portfolio to sectoral and thematic funds. These funds are better suited for experienced investors with in-depth knowledge of specific sectors and a higher risk tolerance.
The Importance of Booking Profits
One common mistake investors make with sectoral and thematic funds is holding onto them for too long. Identifying the right time to exit is crucial to avoid prolonged stagnation of investments.
For example, during the 2008 boom in power and infrastructure funds, many investors failed to exit at the right time, leaving their investments stuck for nearly a decade before recovering losses.
Key Takeaway:
Always monitor sectoral fund performance and book profits when returns are favorable. Reinvest the profits into diversified funds or other asset classes to maintain a balanced portfolio.
Lessons for Investors
1. Diversification Is Key
Thematic and sectoral funds should not form the core of your portfolio. Instead, focus on diversified funds that provide a mix of equity, debt, and other asset classes to minimize risk.
2. Keep an Eye on Market Trends
Sectoral funds tend to perform well during specific cycles. Stay updated on market conditions and sector performance to make informed decisions about buying or selling.
3. Align Investments with Risk Profile
Evaluate your risk tolerance before investing. Sectoral funds are inherently riskier and may not be suitable for conservative investors.
4. Stay Patient with Equity Investments
Equity mutual funds are long-term investments. Short-term fluctuations are normal, but staying invested for at least 5-7 years can help ride out market volatility and achieve better returns.
Why Diversified Funds Are Better for Long-Term Growth
Diversified funds, like multi-cap or flexi-cap funds, allocate investments across various sectors and market capitalizations. This approach:
- Reduces risk by spreading exposure.
- Offers stable returns compared to sector-specific funds.
- Adapts to changing market conditions effectively.
For young or less experienced investors, diversified funds are a safer and more reliable option to build wealth over time.
Pro Tips for Managing Mutual Fund Investments
- Avoid Emotional Decisions: Don’t panic during market downturns. Focus on long-term goals and stick to your investment plan.
- Rebalance Regularly: Adjust your portfolio periodically to align with your financial objectives and market conditions.
- Set Realistic Expectations: Understand that all mutual funds carry some level of market risk. Invest with a clear understanding of potential ups and downs.
- Seek Professional Advice: If unsure, consult a financial advisor to guide you through complex investment decisions.
By adopting a cautious yet proactive approach, investors can navigate market volatility and optimize their mutual fund portfolios for long-term success.
