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Yogi Zone

Useful articles for your finance management by our team of experts

share market tips for sector wise investment

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sectoral investmentWhen we look at return of equities in a particular period, often we observe that the highest return is given by a single sector. FMCG sector has been the best performer since last year and this makes investors think why they didn’t invest in this sector. But there is another side of the coin. The worst performer at a point of time also used to be a sector. An example can be banking sector, which was the most preferred one few months ago in the hope of interest rate easing and now it is one of the worst performers.

What should an investor do in such conditions? Let us first understand sectoral investment and its characteristics. Sectoral investments are focused to generate return by investing in a particular industry or sector. They aim to cash in the cycle of boom occurring in the sector. They offer very attractive return if the timing of investment is right. But, they are also at the higher end of the risk spectrum. The concentrated bets of sectoral investment don’t offer downside risk protection as they lack diversification. Therefore, they demand deep understanding of that particular sector and its environment.

Return of a sector tends to be cyclical and is affected by various environmental factors.

Although, investing in a sector may prove very rewarding but its narrow focus on a single sector make it highly volatile and risky. A sector can be the leader when the market advances, but can also be the laggard otherwise. It implies that at a point of time, its return may beat market return but may also result in substantial losses. It is very vital to be able to time entries and exits in a sector.

A particular sector may soon become out of favor and hence it is important to book profits irrespective of holding period. Therefore, such investments need knowledge and active style of investing.

Investment Strategies with Sectoral Investment

We must never forget that diversification is the key to good investment. A well diversified portfolio must lie as the core investment before exploring sectoral investment as satellite portion which works for greater return. Sectoral investment requires consistent monitoring and

may be a part of tactical asset allocation which seeks to take advantage of the short term movements and opportunities in the market.

Sector specific investments are for savvy investors. They aren’t recommended for beginners of equity market. A new investor, who has not watched market cycles, must avoid it. If your equity portfolio is adequately diversified, you can increase your risk appetite to absorb volatility of a sector’s movement. Even if you understand the risk reward ratio of the sectoral investment, it is advisable to limit these investments up to 15% of your equity portfolio.

Points to remember:

  • Before selecting a sector, you must review your existing equity portfolio and find allocation to different sectors. Even the holdings of existing equity mutual fund investments should be taken in account to find exactly what percentage you are going to invest in a sector.

  • You must have proper understanding of the chosen sector and be prepared to invest time and effort to keep yourself up-to-date about the relevant developments. Must remember that the best performing sector changes every year.

  • Know your risk appetite and find how much volatility you can tackle with your sectoral investments. The potential of high return may turn into risk and loss if something happens unexpectedly.

  • Investing in more than one sector reduces risk associated with it.

  • Set a stop-loss level for your investment. It’s not wise to hold a loss position just because you don’t want to book a loss. If the sector faces any long term issues, it’s better to exit from that sector and minimize your losses.

Investment Options for Sectoral Investment

  • Stocks

    :

    If you are able to select leaders of the chosen sector, you can invest in stocks directly.

    Well-researched 3-5 stocks will fulfill the purpose to gain when the sector performs.

  • Indices:

    Some sectoral indices such as Bank Nifty, CNX Infra, CNX IT and CNX PSE are available on stock exchanges. They can be opted for sectoral investment.

  • ETFs

    :

    Exchange traded funds are passive funds and replicate a particular index. They are listed on exchange and therefore provide an opportunity to take advantage of intra-day swings in the market. Though they are very popular in foreign countries, we don’t have many options available in this category in India. But, one can invest in banking and infrastructure sectors through ETFs

    .

  • Mutual Funds

    :

    Sectoral mutual funds are convenient and comparatively safe for investing in a sector. They offer benefits of diversification and expertise of fund manager. They usually hold 15-25 good researched stocks, track them and take action according to market scenario.

  • Thematic Funds

    :

    Thematic funds are more diversified than sectoral funds. They identify a theme according to prevailing trends and use that theme as stock picking guideline. They are expected to perform better than average market with relatively lesser risk than sectoral investment.

Conclusion

Superior return by a sector attracts investors and they ignore their volatile and risky nature. Although sectoral investments perform exceptionally well during certain periods and lend dynamism to a portfolio, it’s a tough call to select potential sectors consistently. They can be a great addition to your portfolio only if you have a very good understanding of the sector and are able to take swift decisions to make entry and exit.

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