Top 10 sectoral mutual funds for investment right now

The last 18 months have been good for mutual fund investors. The post-pandemic V-shaped recovery in the equity market benefited most of the equity mutual fund investors. The biggest gains however accrued to investors who focused narrowly and invested in sectoral funds. 

While the first leg of the rally was led by pharma funds, the IT or technology and commodity focused funds were the real champions in the post-pandemic period.

For example, the BSE IT Index is up 167 percent since the end of March last year while BSE Metals index that tracks metals producers and mining companies is up 259 percent in the last 18 months. In comparison, the benchmark BSE Sensex had rallied 98 percent during the period.  Infrastructure and construction sector oriented funds also did well in the last six months on the expectation of a capex recovery in the country.

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Not surprisingly, the commodity and technology funds have topped the charts in the last one year with overall returns of 100 percent or more. But it's time mutual fund investors start rejigging their portfolio. 

The global commodity rally that led to record high prices of industrial metals and other commodities is now expected to cool off. This will hit the earnings of metal and mining companies.

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At the same time a decline in commodity prices will boost the margins of consumer goods companies including FMCG, consumer durables and auto makers. The rally in technology stocks may last longer given a big jump in global demand for digitisation and online channels in the post-pandemic period. The record high valuation of tech stocks may however limit the upside in this sector for new investors.

All this suggests that in the coming months we will see the emergence of new rally leaders and current leaders may become laggards.

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We can already sense the emerging contour through the relative performance of the key sectoral indices in the last few weeks.

For example, BSE Oil & gas index has been the top performer and is up 12.5 percent since the end of July against a 10.8 percent rise in BSE Sensex during the period. This is largely due to the rally in Reliance Industries that was an underperformer for nearly a year between August last year and July this year.

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Other big winners have been technology companies like Tata Consultancy Services, Infosys and Wipro among others. The BSE IT Index that tracks the share price of these companies is up 11 percent since the end of July. The consumer goods and FMCG companies have also now begun to do well and the BSE FMCG Index is up 10 percent in the last five-weeks.

In contrast, the BSE Metal Index is down two percent during the period as the share price of metal and mining companies have started to correct. Pharma companies have been another big loser and BSE Pharma Index is up just 1.8 percent since the end of July.

This reflects in the short-term performance of sectoral mutual funds. The commodity and infrastructure oriented funds have now begun to underperform while technology and consumer goods oriented funds are now topping the charts.

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Here are ten mutual funds that have topped the charts in the last one month. All data is from ICRA Analytics Mutual Fund India database.

At the top of the list is Tata Digital India Fund that has given nearly 10 percent absolute returns in the last one month. The fund has delivered 109.2 percent return in the last one year. With Assets under management (AUM) of around Rs 2800 crore, the fund is heavily invested in top IT companies such as TCS, Infosys, HCL Tech and Tech Mahindra and is expected to continue its good run in the near term.

ICICI Prudential Technology Fund is second spot with one month absolute returns of 8.62 percent and one year returns of 110.5 percent. With an AUM of around Rs 4100 crore the fund is heavily exposed to Infosys (20.3% of its portfolio) that makes it a little risky. 

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SBI Equity Minimum Variance Fund is at the third spot with 7.84 percent returns in the last one month and 49.1 percent returns in the last one year. It’s a defensive or low-risk fund with its portfolio evenly distributed among top IT and FMCG stocks such as Nestle, TCS, Hindustan Unilever, Britannia, Dr Reddy's Lab and Divi's Lab. A small fund with an AUM of Rs 104 crore, it can be used by investors to reduce volatility in their portfolio. 

SBI Technology Opportunity Fund has also done well and is up 7.6 percent in the last one month and 97.3 percent in one year. But it would be a risky bet for investors given that 25 percent of the fund AUM is invested in Infosys.

Next on our list is Aditya Birla Sun Life Digital India Fund that has given 7.45 percent returns in the last one month and 99.2 percent returns in the last one year. It’s a fairly big sectoral fund with an AUM of Rs 1950 crore but its portfolio is skewed towards Infosys (18.5% of portfolio) that raises its risk quotient.

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Franklin India Technology Fund is next with 7.3 percent returns in the last one month and 70.3 percent returns in one year. But it is also a risky bet for investors given that nearly a quarter of its AUM is invested in a single stock - Infosys.

In contrast Tata India Consumer Fund and Nippon India Consumption Fund is likely to be a better bet in the current environment given their diversified portfolio and expected good show by FMCG companies.

ICICI Prudential FMCG Fund is also a good bet on consumption revival but nearly 40 percent of its portfolio is accounted for by ITC and Hindustan Unilever that raises the downside risk for investors.

(Advice: This article is for information purpose only. Readers are advised to consult a certified financial advisor before making investment in any of the funds or securities mentioned above.)

(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).

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