These 2 sectoral MF categories gave over 20% return in 5 years; what's next?

Apr 14, 2024, 03:47:58 PM IST

ETMutualFunds analysed the performance of all equity mutual fund (MF) categories and found that two sectoral categories gave 23% each in the last five years. Take a look:

ETMarkets.com

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Energy & power-based funds

Energy & power-based MFs gave an average return of 23.40% in the last five years. Three schemes in the category completed five years of existence. Nippon India Power & Infra Fund gave a 26.35% return. Tata Resources & Energy Fund and DSP Natural Resources & New Energy Fund gave 22.87% and 20.98% returns, respectively, in the same period.

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Pharma & Health Care sector-based funds

These funds gave 23.08% returns in the last five years. Eight schemes in the category completed five years in the market. DSP Healthcare Fund, the topper in the category, gave 25.82% in five years. LIC MF Healthcare Fund gave the lowest return of 19.01% return in five years.

Agencies

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How is such performance by these categories?

“The pharma sector has outperformed on the back of a stable pricing environment in the United States. Valuations in the pharma/healthcare sector are currently trading at a forward PE multiple that is well above long-term averages. Energy and infrastructure mutual funds have performed well as a result of both an increase in order books and capex spending from the government,” said Vishal Dhawan, CEO, Plan Ahead Wealth Advisors, a wealth management firm in Mumbai.

Agencies

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Previous Performance

The two categories gave similar returns in one year (April 2023 to April 2024) period as well. Both the categories offered 57% each in the said period. Energy & power funds gave a 57.57% return and pharma & healthcare funds gave a 57.78% return on a one-year trailing return basis.

Agencies

“Thematic or sectoral funds should be a part of portfolios only if investors have a higher risk tolerance and an investment horizon of 10+ years. It is very important to get cycles right whilst investing in a thematic fund as there may be a prolonged period of underperformance if the timing is incorrect. As a result, we recommend limiting exposure to 10% of the overall portfolio to a theme. Sectoral/thematic funds should be in the satellite part of a portfolio and one should consider profit booking in themes/sectors that are trading in excess valuations,” recommends Dhawan.

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What strategy should one follow?

“If we look at current valuations both energy and power are also trading above their long-term forward earnings. Thus we would suggest caution for investors looking to add to both these sectors now,” Dhawan added.

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