There is no limit on the number of sectoral or thematic mutual funds an AMC can produce. So, they do just that! These have huge fees and are marketed as the next big theme to profit from. But how consistent are they in beating a large cap index like Nifty 100 TRI?
Note: These are not investment recommendations, and investors should not use the funds listed below as investments. We are trying to point out most thematic funds fail to beat a simple large cap index. This means picking a fund that would outperform in future is impossible. Sectoral funds are generally more volatile than diversified indices or mutual funds. Such funds are suitable only for investors who can appreciate the dynamics of a particular sector or theme and can make tactical (quantitative or qualitative) entries and exits. See, for example, Do not use SIPs for Small Cap Mutual Funds; try this instead!
We consider every possible 3,4, and 5-year investment window between Jan 2013 and Sep 2023.
We shall define a return outperformance consistency = no of times fund beat index/tot no returns. For example, we have 100 3-year return data points, and a fund returned higher than the index in 65 instances. Then return outperformance consistency = 65/100 = 65%.
To qualify as a “consistent performer,” the fund should have a return outperformance consistency of 70% or more. The data for all equity fund categories are published in monthly performance consistency screeners.
- Five years: Among 66 thematic/sectoral funds with over 500 rolling return five-year data points, only 17 quality with a return outperformance consistency of 70% or more.
- Four years: Among 66 thematic/sectoral funds with over 500 rolling return four-year data points, only 15 quality with a return outperformance consistency of 70% or more.
- Three years: Among 71 thematic/sectoral funds with over 500 rolling return three-year data points, only 9 have a return outperformance consistency of 70% or more.
The following funds have a return outperformance consistency of more than 70% over 3Y, 4Y, and 5Y.
- Canara Robeco consumer trends fund – direct plan-growth option
- Aditya Birla Sun Life India Gennext Fund – Growth – Direct Plan
- Tata Digital India Fund-Direct Plan-Growth
- Mirae Asset Great Consumer Fund – Direct Plan-Growth
- Mirae Asset Healthcare Fund Direct-Growth
- ICICI Prudential Pharma Healthcare and Diagnostics (P.H.D) Fund – Direct Plan
- DSP Natural Resources and New Energy Fund – Direct Plan-Growth
- Aditya Birla Sun Life Digital India Fund – Growth – Direct Plan
There are 110 thematic/sectoral funds, out of which we have studied 66. Only eight have consistently outperformed a large cap index. While this is not the investment mandate of the funds, the large cap index serves as a benchmark for the retail investor. Why would I invest in such expensive funds if a simple large cap index fund (Sensex/Nifty/Nifty 100) performs better?
We, therefore, recommend that investors avoid all thematic or sectoral funds unless they have a good understanding of the investment universe and can make tactical entry or exit calls.
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Dr. M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter, Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
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