Dalal Street Investment Journal – July 20, 2019

DSIJ.in JULY 22 - AUG 4, 2019 I DALAL STREET INVESTMENT JOURNAL (^139)
MF Page - 11
Sector investment strategies means
finding the best sector to invest in the
forthcoming year. Investing in sector
funds can generate better returns if you
could identify the future winners
among the sectoral funds.
The graph shows your return if you
would have been investing in the best
sector of that year and earning average
return of that sector. (Annual
Performance of Sectoral Funds)
Top 10 Sectors where MF have increased their holding most in %age
Amount `Crore Invested by MF % of Total MF Assets
Sector May-19 Apr-19 Mar-19 Feb-19 Jan-19 Dec-18 May-19 Apr-19 Mar-19 Feb-19 Jan-19 Dec-18
BANKS 274724 257757 261134 228920 228774 222523 24.46 23.62 23.8 22.87 22.83 21.85
CONSUMER DURABLES 26603 26649 26485 20127 19935 19816 2.37 2.44 2.41 2.01 1.99 1.95
PETROLEUM PRODUCTS 62066 61755 62108 55427 53957 52029 5.53 5.66 5.66 5.54 5.39 5.11
CEMENT 32224 29441 26907 24365 22772 25236 2.87 2.7 2.45 2.43 2.27 2.48
TELECOM - SERVICES 17232 13260 12035 11918 11387 12066 1.53 1.22 1.1 1.19 1.14 1.18
CONSTRUCTION 11824 10521 10829 8687 8808 8975 1.05 0.96 0.99 0.87 0.88 0.88
HOTELS 8650 8570 8701 7282 6673 6551 0.77 0.79 0.79 0.73 0.67 0.64
INDUSTRIAL CAPITAL GOODS 23971 22227 21851 19993 19930 20939 2.13 2.04 1.99 2 1.99 2.06
CONSTRUCTION PROJECT 47990 42445 42953 41298 39417 42808 4.27 3.89 3.92 4.13 3.93 4.2
SOFTWARE 95367 98756 94704 94896 94445 86094 8.49 9.05 8.63 9.48 9.43 8.45
CHEMICALS 19705 17297 17551 15764 17009 17454 1.75 1.59 1.6 1.58 1.7 1.71
Identifying the next winner
Nonetheless, the problem is identifying the sector that is going to perform next year. Here are couple of ways in which you can
identify the sectors that can generate superior returns next year.
First, the above table (Annual Performance of Sectoral Funds) clearly shows that no single sectoral fund has been the best performer
for two consecutive years. Hence, you should avoid investing in those sector funds that were top performers of the previous year.
For example, tech funds that were the top performer of the year 2018 may not rank number one next year and hence should be
avoided. We can already see certain headwinds such as appreciating rupee adversely impacting the tech funds.
What is also observed from the above table is that the sectoral funds have also not given two years of consecutive negative returns.
Looking at year 2018 returns, except for tech funds, all other sectoral funds have generated negative returns. So, which are the best
sectoral funds to invest now? Looking purely at the numbers above, we see that the infrastructure sector has a better chance. This is
also corroborated by the fact that in the previous election years, such as in 2014, infrastructure funds were the best performers.
Moreover, in the year 2018, these funds were the worst performer.
To dig deeper into this, we thought that institutional investors who are better equipped than a common investor might give us the
indication where they are increasing their holdings. For this, we studied where mutual funds are increasing their stakes. The SEBI
data shows that in the last six months ending May 2019, MFs have collectively increased their stake highest in banks. In the last six
months, their stake has increased from 21.85% to 24.46%. It is followed by consumer durables, petroleum products and cements. If
we analyse the top 10 sectors where there is maximum inflow of funds, it looks like infrastructure is going to generate better
returns going ahead.