How to Pick a Sector Fund


A few sector funds are topping the performance charts. But before you decide to invest in one of them, do remember that the great run the fund is currently on may be short lived. As we look at the 1-year returns when writing this story (September 24, 2012), SBI Magnum FMCG displays a fabulous 33 percent, ICICI Prudential Technology stands at 28 percent and SBI Magnum Pharma at 24 percent.

What’s common amongst these three?

All are sector funds.

However alluring the returns appear, investing in such funds is very tricky. Investors tend to look at the latest performance and get influenced. That’s a recipe for disaster. Getting into a sector needs you to look at the valuations, momentum going ahead, fundamentals of the sector as well as the business cycle. To invest on the assumption that the sector will continue to do well is naive and baseless. It could plummet and how would you feel about that?

ICICI Prudential Technology trounced the Nifty in 2009 but underperformed the index substantially in 2007 and 2008. In 2007, SBI Magnum Pharma delivered a measly 7 percent when the Nifty returned 55 percent. Take a look at the table to see that different sectors hog the limelight at different points in time.

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