The net asset values (NAVs) of several funds launched recently have shed as much as 21% from their offer price of Rs.10 per unit

Mutual fund NAVs of most thematic, sectoral NFOs below issue prices: What should investors do now? Some of the most impacted have been the passive schemes based on defence, PSU, tourism and metal indices, and momentum based strategies. What should mutual fund investors do now?

The investors who had poured money in fund launches, especially in sectoral and thematic equity schemes that were hot at the time, are facing losses in the wake of the recent sell-off in the stock market. The net asset values (NAVs) of several funds launched recently have shed as much as 21% from their offer price of Rs.10 per unit.

Some of the most impacted have been the passive schemes based on defence, PSU, tourism and metal indices, and momentum based strategies. Their NAVs are between Rs.8 and Rs.9 now, indicating a 10-20% fall.

While the decline in defence and PSU stocks began in July, the drop precipitated from 27 September onwards when the broader sell-off commenced, triggered by strong foreign institutional outflows. During this period, the Nifty 50 fell 10.44%, the Nifty Midcap 150 fell 10.9%, while the Nifty Smallcap 250 fell 9.1%. The Defence index dropped 10.25%, the PSU index shed 11.7% and the Metal index has declined 12.28% since 27 September.

NFOs that have incurred losses

“While the pain has been felt across the board, it is more visible in some of the new fund offerings, especially index funds, which have been around popular themes with valuation concerns,” says Nirav Karkera, Head of Research, Fisdom.

Sectoral mutual funds have not been able to meet investor expectations as such funds attract most of the money when the sector is hot, rather than during periods of attractive opportunities, says Rajeev Thakkar of PPFAS Mutual Fund. “The investment outcome for investors has not been that great. Funds get launched and garner most of the money when the sector is ‘hot’ and do not get investments when the opportunities are really attractive. We have already seen some of the newer sectoral, thematic funds with NAVs below the offer price,” stated Thakkar in his latest letter to unitholders.

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Rear-view mirror investing
Mutual funds had launched these schemes when many themes, such as defence and PSUs, had already returned more than 100% in the preceding year. The NFOs attracted several first-time investors, who were led by high-decibel marketing and higher payouts to distributors, partly on the perception that there wasn’t much to lose in subscribing to an NFO at par value. NFOs have mobilised Rs.1.08 lakh crore in the past 12 months.

The losses may call for a reassessment of holdings. “Investors with high allocation to thematic funds and without any conviction are better off exiting these and moving to diversified equity funds,” says Viral Bhatt, Founder, Money Mantra. “Narrow thematic funds are for aggressive investors, who should allocate only 5% of their portfolio to such bets in a staggered manner, with a time frame of around seven years.”

The latest market data shows that sectoral funds have the highest assets under management (AUM) of Rs.4.52 lakh crore, more than other diversified equity fund categories. Thakkar says most investors would benefit from sticking to diversified equity funds rather than trying to identify the ‘best’ performing sector or theme.

Mutual fund advisers do not recommend sectoral or thematic funds to new or inexperienced investors. These schemes have a concentrated exposure to one sector or theme, unlike a diversified fund that spreads the risk thin across several sectors. Since the universe is narrow and there are only a few stocks to invest in, the top 4-5 stocks in a sectoral or thematic fund account for a significant portion of the portfolio. A downturn in one or two holdings can hurt the fund.

Every sector or theme goes up or down in certain phases in the economy. As ET Wealth had cautioned readers in July, these schemes suit seasoned investors who stay ahead of the curve and have good knowledge of recent developments, trends and policy changes. They are savvy investors who understand sectoral dynamics and are willing to take extra risk to earn higher returns.

Not for the long term
The cyclicity of sectoral and thematic funds also means they are not meant to be kept in the portfolio forever. Just like savvy investors know when to get in, they also know when to exit. “The timing of the exit is extremely crucial. If you get it wrong, you’ll be in it for a really long time without making any money,” says Santosh Joseph, Founder, Germinate Investor Services.

In 2008, when the power and infrastructure sectors were doing very well, there were several NFOs in the infrastructure category. “The people who invested in these funds, but didn’t exit at the right time, suffered losses when the tide turned against these sectors. It took almost 8-10 years for these funds to recover,” adds Vivek Banka, Co-founder, Goalteller.

Though they have the potential to give high returns, sectoral funds should not form the core of your investment portfolio. Financial planners say one should not put more than 10-15% of the investment in a sectoral or thematic fund. The core of the portfolio should be an index fund and diversified schemes. Also, when a sectoral or thematic fund gives good returns, book partial profits. “Rebalance your portfolio by taking out profits from thematic funds once it exceeds the allocated percentage,” says Banka.

This story originally appeared on: India Times - Author:Faqs of Insurances