FUND FULCRUM

July 2020

The latest AMFI data shows a huge decline in pure equity funds’ net inflows due to outflows in large cap funds and multi cap funds. The Rs.5,000 crore negative net change reverses the trend of the last few months. Both the categories saw sudden outflows in June 2020 compared to the previous month. Multi cap funds saw an outflow of Rs.777 crore as against an inflow of Rs.758 crore in May 2020. Similarly, large cap funds witnessed an outflow of Rs.212 crore as against inflow of 1,555 crore in May 2020. Outflow is due to a sharp bounce back in the equity market in the last one month which led to profit booking by investors. Due to the whole pandemic impact and the market gains recently, investors have redeemed their investments to manage their cash flow requirements. However, the continuing outflow trend in hybrid funds should be a matter of worry. Among hybrid funds, only arbitrage funds continued to get positive inflows. Further, monthly SIP inflows came down below Rs.8,000 crore mark at Rs.7,927 crore in June 2020. Overall, debt funds also saw a fall in net inflows in June 2020 to Rs.2,861 crore from Rs.63,665 crore. This indicates a net decrease of Rs.60,803 crore driven primarily by the outflows in liquid funds. Corporate bond funds saw a hike in net inflows to Rs.10,737 crore from Rs.3,831 crore. Categories like ultra-short duration funds, low duration funds, money market funds and short duration funds also saw considerate inflows in June 2020. Overall, the MF industry AUM reached the Rs.25 lakh crore AUM mark in June 2020. Reducing interest rates, gradual unlocking of economic activity with expected return to normalcy has seen renewed buoyancy in markets leading to mutual fund AUM crossing Rs.25 lakh crore mark for the first time in the last three months.

Amid the nationwide lockdown and volatile equity markets, the MF industry has added over 2.55 lakh new investors between April 2020 and June 2020. In April 2020, the MF industry added 1.04 lakh unique investors, 53,964 new unique investors in May 2020 and 97,597 new investors in June 2020. As a result, the overall unique investors count has risen to 2.10 crore as on June 30, 2020. If compared with the Jan-Mar 2020 numbers, addition of new investors has fallen by nearly 50%. The industry had added 5.08 lakh unique investors in the March 2020 quarter. Nevertheless, this number is encouraging given the fact that Apr-Jun 2020 has always been a leaner quarter as against Jan-Mar 2020. Moreover, many distributors and advisors rely heavily on in person meetings and physical transactions to onboard clients. Most of the new investors have come via tech platforms where the onboarding is completely digital. Falling FD rates has prompted many investors to invest in liquid funds through these platforms.

The first quarter of FY 2020-21 was not so encouraging for the MF industry. Of the 41 fund houses in the MF industry, 39 have witnessed a decline in their AAUM in April-June 2020, shows latest AMFI data. During this lockdown quarter, industry’s AAUM dropped by 9% to Rs 24 lakh crore from Rs 27 lakh crore in the preceding quarter. However, PPFAS MF and ITI MF are the two fund houses that bucked the trend. While AAUM of PPFAS MF grew by Rs 463 crore or 15% to Rs 3,600 crore in April-June 2020, ITI MF's AAUM grew by Rs.54 crore to Rs.581 crore. PPFAS believes their AMC’s consistent philosophy of value-investing and transparent communication has helped them grow their business even in such uncertain times. Adding to it, their consistent exposure to international funds in the last seven years has finally paid off. Franklin Templeton MF was the fund house with the highest decline in AAUM. Its AAUM fell by Rs 36,514 crore to Rs 79,808 crore. Aditya Birla Sun Life MF, Nippon India MF and ICICI Prudential MF were the next three fund houses that saw the highest drop in AAUM in absolute terms. In percentage terms, Sahara MF, YES MF and Baroda MF witnessed the highest decline in AAUM with 99%, 77% and 38%, respectively. Overall, the industry’s assets came down by Rs.2.40 lakh crore to reach average AUM of Rs.24.60 lakh crore in April-June 2020. SBI MF and HDFC MF continue to hold the top two positions of highest AAUM. SBI MF’s AAUM stood at Rs.3.6 lakh crore, down by merely 2% or Rs.9,000 crore from last quarter. HDFC MF’s AAUM was at Rs.3.5 lakh crore, down by 4% or Rs.13,000 crore. The lockdown quarter has been good for Axis MF as it became the seventh largest fund house, overtaking UTI MF. While both the fund houses witnessed a decline in AAUM, Axis MF fell by 3% or Rs.4,000 crore at Rs.1.34 lakh crore. UTI MF lost 12% or Rs.17,000 crore at Rs.1.33 lakh crore. ICICI Prudential, Aditya Birla Sun Life, Nippon India and Kotak MF remained in the top 10 list. AAUM of these fund houses stood at Rs.3.26 lakh crore, Rs.2.14 lakh crore, Rs.1.80 lakh crore and Rs.1.67 lakh crore, respectively. Both ICICI Prudential and Nippon India saw an erosion of assets of over Rs.24,000 crore compared to last quarter. Aditya Birla Sun Life MF saw a fall of over Rs.32,000 crore from its average AUM. In terms of percentage, SBI, HDFC, and Axis MF saw the smallest drop in AAUM with 2%, 4% and 3% respectively. 

Axis MF, ICICI Prudential MF and Mirae Asset MF added the highest number of folios last financial year, according to AMFI data. While Axis MF added 21.21 lakh folios in FY 2019-20, ICICI Prudential MF added 16.77 lakh folios and Mirae MF 11.73 lakh new folios. SBI MF and DSP MF follow at 4th and 5th position with 7.35 lakh and 3.35 lakh new folios, respectively. In percentage terms, Mirae Asset MF and Axis MF registered highest growth in new folio creation with 84% and 55%, respectively among the top 15 fund houses. These fund houses have delivered good performance over the last few years. The exemplary performance of schemes of these fund houses, especially Axis and Mirae is the reason for their highest addition in new folios. Overall, Yes MF and PPFAS MF saw 180% and 130% growth in terms of new folio addition, respectively. However, not all fund houses saw an increase in new folios. AMFI data shows that 11 fund houses - Nippon India MF, L&T MF, UTI MF, Franklin Templeton MF, IDBI MF, Principal MF, Essel MF, Sahara MF, HSBC MF, BOI AXA MF, and BNP Paribas MF witnessed a decline in their number of folios. Overall, UTI MF remains the largest fund houses in terms of number of folios. The fund house has over 1 crore folios as on March 2020 followed by HDFC MF (94.22 lakh) and ICICI Prudential MF (93.84 lakh). ITI MF, Kotak MF and JM Financial MF have been excluded as their data was not available on the AMFI website.

The nationwide lockdown has affected new SIP registration in the Rs.25 lakh crore MF industry. The latest quarterly AMFI data shows that new SIP registrations have declined by 7.24 lakh to 24.71 lakh in April-June 2020 compared to 31.95 lakh in January-March 2020. In addition, the industry has seen marginal increase in SIP discontinuation. Discontinuation of SIPs increased to 18.50 lakh in June quarter as against 17.71 lakh in March quarter. Decline in number of new SIP registration and marginal increase in discontinuation of SIPs is largely due to financial constraints and weak economic sentiments. The actual number of new SIPs in June is higher than the previous two months. In fact, at gross level, the industry added around 9 lakh new accounts. And the total number of accounts went up to 3.23 crores, higher than April 2020 or May 2020. Overall, over 6 lakh net new SIPs were added in April-June 2020. So, while it might be called a slowdown, it is pretty normal for SIP investors to delay their commitment to long term plans in the face of short term adversity. We hope that these investors will come back again to the industry after a while. Financial constraint due to job loss or salary cuts is the key reason for increase in SIP discontinuation and decline in new SIP registrations. Further, volatile market conditions and slowdown in the economy are discouraging many investors to enter the market. Many investors could not digest heightened volatility which is currently happening in the market. Meanwhile, many investors have booked profit in June 2020 and discontinued their existing SIPs till things settle down.

Piquant Parade

The latest AMFI data shows that most AMCs were able to resolve investor complaints within 30 days.

SEBI has reconstituted its mutual fund advisory committee (MFAC). The market regulator has appointed former RBI Deputy Governor Usha Thorat as the new Chairperson of MFAC.

Aditya Birla Sun Life Mutual Fund has introduced a host of services for MF distributors empanelled with them. The services include execution of transactions and generation of account statements on Whatsapp.

Regulatory Rigmarole

From July 1, 2020, the cost of investment in direct stocks, mutual funds, ULIPs and NPS has gone up for investors due to incidence of double stamp duty taxation.

In a move to bring uniformity across fund houses in terms of dealing with transfer of assets due to demise of unitholders, AMFI has introduced a new set of norms for transmission of units in mutual funds due to absence of nominations or death of unitholders.

• ·       Deletion of names of deceased unit holders in joint holding

  ·         Assets need to be transferred to surviving joint holders

  ·         Demise of sole owner or all owners - Nominee is registered

  ·         Demise of sole owner or all owners - Nominee is not registered

  ·         Appointment of new Karta due to demise of existing Karta

  ·         Demise of Karta of an HUF

Capital markets regulator SEBI said valuation of market-linked debentures will be carried out by an agency appointed by mutual fund industry body AMFI.

In a bid to make debt funds more transparent, SEBI has asked fund houses to disclose the portfolio of their debt schemes on a fortnightly basis within 5 days of every fortnight. The market regulator has asked MFs to follow the new disclosure norm from October 1, 2020.

AMFI has allowed distributors working under sub broking model with national distributors to transfer their assets to own ARN. So far, transfer of AUM from national distributor to sub distributor was not allowed as partial transaction of assets is not allowed in mutual funds.

While the world is talking about pre and post COVID era, it is clear that we will have to live with coronavirus at least for a while. Heightened volatility due to coronavirus pandemic has led many investors to review their investments. In fact, many investors have shown their interest in investment products that can protect them from downside risk. Many investors will choose less risky and high quality investment products over return generating volatile products. In addition, many investors will follow a staggered way of investing to reduce risk of timing the markets and benefit from averaging. In such a scenario, a major challenge for the MF industry is to break the assumption that all mutual funds are risky. Awareness should be created that mutual funds also offer products across different time frames depending on the risk appetite of investors. There is huge possibility that MF industry may face difficulty in increasing revenue due to uncertain economy and market conditions. In such a scenario, one of the key trends to watch out for will be how AMCs and mutual fund distributors (MFDs) manage their cost. The MF industry should focus on optimizing cost instead of reducing it. This could be done by embracing digital technology, improving efficiency, cutting down on travel, trimming infrastructural requirements and so on. The objective should be to look at all aspects of cost optimization. Currently, both AMCs and MFDs have been conducting a host of digital events to engage with their target audience on a regular basis. However, these digital meetings lack personal interaction with target audience, which ultimately defeats the very purpose of engagement. Hence, AMCs and MFDs should shift their focus on engaging with their target audience on a more personal level. Another crucial trend will be to understand behavioral aspects to connect with clients emotionally. So far, most of us have focused on delivering numbers. While the performance numbers are important, ultimately when people are investing for goals and their lives, and especially in situations like this when things are challenging, we need to start acknowledging the emotional aspect of investing as well. The move to digital transactions will be one of the key trends going forward. Just as many people are using phone and web based banking, MFs will also see a sharp rise in usage of technology for transactions. The industry is likely to continue the efficiency obtained not only on the transaction front but on the communication front through digitization as well. Virtual meetings which took off during the lockdown could be the norm in future also.

NFONEST

July 2020

After a lone New Fund Offer (NFO) made its appearance in June 2020, July 2020 has just two NFOs open in view of the ongoing COVID-19 pandemic.

Motilal Oswal Multi Asset Fund

Opens: July 15, 2020

Closes: July 27, 2020

Motilal Oswal Mutual Fund has launched Motilal Oswal Multi Asset Fund, an open ended fund that will invest across three asset classes – equity, debt, gold. The fund aims to generate long term capital appreciation by investing in a diversified portfolio comprising equity, international equity index funds/equity ETFs, debt and money market instruments and gold exchange traded funds. The fund will invest 10-50 per cent in equity, international equity index funds and equity ETFs, 40-80 per cent in debt, money market instruments and 10-20 per cent in Gold ETF. Debt and money market instruments will be in AAA papers with a 3-5 year average maturity. Different asset classes react differently to business cycles, changes in economy and geo-political realities and hence have different levels of risk. Allocating funds solely to a single asset class is not prudent as it is prone to behave inconsistently, go through its own cycles and may not garner efficient inflation and risk adjusted returns. Asset allocation tries to balance the risk by dividing assets among investment vehicles. Low correlation among different asset classes provides the portfolio with an effective hedge in lowering the volatility of the portfolio. The benchmark for the fund will be 30% Nifty 50 TRI + 50 % Crisil Short Term Gilt Index + 10% Domestic Price of Gold + 10% S&P 500 Index (TRI). The fund will be managed by Mr Siddharth Bothra, Mr Abhiroop Mukherjee, Mr Herin Visaria and Mr Swapnil Mayekar. 

Mirae Asset Banking and PSU Debt Fund

Opens: July 8, 2020

Closes: July 20, 2020

Mirae Asset has launched Mirae Asset Banking & PSU Debt Fund. It is an open ended debt scheme predominantly investing in debt devices of banks, public sector undertakings, public monetary establishments and municipal bonds. According to SEBI, a banking & PSU fund is an open ended debt scheme which has to speculate not less than 80% of its belongings in debt devices of banks, public sector undertakings and public monetary establishments. The scheme seeks to have increased Allocation in AAA rated devices. The scheme proposes to usually keep a portfolio length of two to five years with use of G-sec to shift length. Mirae Asset Banking & PSU Fund will be benchmarked against NIFTY Banking and PSU Debt Index. The scheme will be managed by Mahendra Jajoo.

GEM GAZE

July 2020

Many people believe that if you pick the fastest growing sector or sectors in which to invest, you get a leg up on the investing competition and can outperform the general markets. Over the long haul, you can expect sectors to move based upon the strength of the revenue growth and the demand for the products and services sold by the companies within a sector. The July 2020 GEMGAZE would provide some of the best sector mutual funds which can fetch you phenomenal returns provided you ride the cycle at the appropriate time.

The consistent performance of all four funds in the October 2019 GEMGAZE is reflected in all the funds holding on to their esteemed position of GEM in the July 2020 GEMGAZE.  

Canara Robeco Infrastructure Fund Gem

Gaining on growth

Canara Robeco Infrastructure Fund, incorporated in December 2005, is a thematic fund completely focused on identifying growth-oriented companies within the infrastructure space. The fund, with an AUM of Rs 90 crore, aims at having concentrated holdings with 67.76% of the assets in the top three sectors Energy, Construction and Engineering. The fund has large market capitalization stocks at 52.83%. The scheme's fund manager avoids companies operating in segments that have high entry barriers. With a well-diversified portfolio of stocks in the energy, construction, and services sectors, it employs fundamental analysis with a focus on factors such as the industry structure, the quality of management, sensitivity to economic factors, the financial strength of the company and the key earnings drivers. The fund benchmarks the performance of its portfolio against the S & P BSE India Infrastructure TRI. Canara Robeco Infrastructure has been among the better performers in its category. The fund’s one-year return is -12.63% as against the category average return of -15.45%. In the past five years, the scheme has given 0.59% returns, while its category has given 0.73% returns in the same period. In the past ten years, the fund has given 5.76% returns, while the category has given 3.74%. The expense ratio of the fund is high at 2.6% while the portfolio turnover ratio is 52%. The fund is managed by Mr. Shridatta Bhandwaldar and Mr. Miyush Gandhi.

SBI Consumption Opportunities Fund (erstwhile SBI Magnum FMCG Fund) Gem

The triumphant topper

In the past one year, the Rs 542 crore, SBI Consumption Opportunities Fund, incorporated in July 1999, is perched at the top with 32.18% of the assets in large caps. 65.75% of the assets are in the top three sectors FMCG, Textiles and Services. The expense ratio is high at 2.65% and the portfolio turnover ratio is 60%. Braving all odds, the one-year return of the fund is –10.97% as against the category average of 2.4%. Over the five and ten year periods, the fund posted 5.69% and 13.65% of CAGR, respectively as against the category average of 7.31% and 11.25% respectively. SBI Consumption Opportunities Fund is benchmarked against the NIFTY India Consumption TRI. Mr. Saurabh Pant has been managing the fund since June 2011.

ICICI Prudential Banking & Financial Services Fund Gem

Bountiful bottom line

ICICI Prudential Banking & Financial Services Fund, incorporated in August 2008, invests predominantly in large and midcap financial companies. 66.19% of the portfolio consists of large caps. This fund adopts a 'bottom-up' strategy, to identify and pick its investments across market capitalizations. The fund has not only outperformed its benchmark, the NIFTY Financial Services TRI but has also outperformed other banking sector funds. The current AUM of the fund is Rs 2,538 crores and the one-year return is -25.29% as against the category average return of -25.66%. Over the five and ten year periods, the fund posted 5.37% and 11.88% of CAGR, respectively as against the category average of 1.4% and 4.68% respectively. The expense ratio is 2.27% and the portfolio turnover ratio is 50%. The fund is managed by Mr. Roshan Chutkey since January 2018.

 ICICI Prudential Technology Fund Gem

Opportunities in the offing

Consumers’ appetite for new technologies has been driving growth in the technology sector for years. This is providing good opportunities for technology companies. ICICI Prudential Technology Fund is a Rs 379 crore technology fund, which invests in large technology oriented companies. It invests in companies listed in the BSE Teck. Its portfolio has 74% exposure to large cap companies. The fund seeks to invest in knowledge sectors like IT and IT Enabled Services, Media, Telecommunications, and others. The one-year return of the fund is 2.5% as against the category average of 5.08%. The five-year and ten-year returns of the fund are 8.78% and 13.8% as against the category average of 10% and 12.35% respectively. The fund is benchmarked against the S& P BSE IT TRI. The expense ratio of the fund is 2.69% while the portfolio turnover ratio is 45%. The fund is managed by Mr. Sankaran Naren since July 2017 and Vaibhav Dusad since May 2020. Incorporated in March 2000, this fund which is one of the oldest technology sector funds available in market has lived up to the expectation of investors over the past years and is one of the most popular in this category.

FUND FLAVOUR

July 2020

In the world of investing, there are investors who firmly believe in ‘High-risk High-return’ investments. And for such high-risk takers, mutual funds have something to offer – Sector Funds! Sector Mutual funds invest in a particular sector as defined by their investment objective. A sector fund is a type of mutual fund that invests in securities of specific sectors of the economy, such as banking, telecom, FMCG, pharmaceutical, Information Technology (IT), and infrastructure. In other words, sector funds narrow down your invested wealth only to the specific industry or sector. For instance, a banking sector fund can invest a minimum of 80% of total assets in stocks of banking companies. The overall objective of such investment is to invest in those sectors which have a high growth potential in the near future. The main idea is to tap-in on the growth of a particular industry and sector. Such mutual funds can double or treble your money and investors with a high-risk appetite can invest in sector funds. These funds can really end up making a huge profit, if the timing of investment is accurate. Rather than buying individual stocks, investing in sector funds would ensure that a company’s bad performance would not affect your portfolio. Sector funds exhibit the ability to protect you from individual firm-specific risk. But, before you invest in a sector mutual fund, you should be confident on why you believe that sector is likely to perform well in the near future.

Sectors and themes to bet on…

Sectoral mutual funds or mutual fund schemes that invest in specific sectors or themes are recommended only to highly informed investors. These schemes are notorious for going through highly-rewarding phases, followed by prolonged rough patches. Government has been spending a lot of money on infrastructure and it will continue to do so for next few years. Apart from the infrastructure schemes, IT, pharma and FMCG schemes may also deliver good returns. IT and Pharma are more of contra play, simply because Pharma has been undervalued and IT was reasonably valued over the last couple of years. Pharma sector, which was facing trouble from US FDA, is poised to bounce back. Similarly, the IT sector has been underperforming because of the global slowdown. The IT sector has lot of companies which are very strong with sound products and services. So a good IT sector fund can give you moderate returns over next 2 to 3 years. Public sector enterprise (PSE) is another segment that was beaten down by stock market players till now and has started reviving only recently. Despite its recent outperformance, experts continue to remain bullish on banking and financial services sector since the banking sector is mostly out of the NPA problems and earnings revival is expected. First, ensure the sector is undervalued. Two, the sector should have certain triggers in the next one to two years that will lead to the broader growth of the sector. Unless you are convinced of these two things, you should not look at sectoral funds.

…a roller coaster ride

Many of the equity mutual fund schemes have either given low returns or negative returns in the last one year. However, sector mutual fund schemes are performing well and gave upto 28.3% in the last 1 year, 11.8% in the last 3 years and 17.7% in the last 5 years. Banking and Finance sector returned 14.8%, 6.9 % and 8.7% in the last 1, 3 and 5 years respectively. FMCG sector returned 28.3%, 11.8 % and 17.4% in the last 1, 3 and 5 years respectively. Infrastructure sector returned 21.6%, 11.4 % and 17.7% in the last 1, 3 and 5 years respectively. Technology sector returned 25.7%, 4.6 % and 14.4% in the last 1, 3 and 5 years respectively. Chart topping performance (12.8%) by energy funds during the past five years is mostly because of the rally in Reliance Industries.

Historical Returns – a recipe for disaster

Retail investor interest in thematic and sector funds have been increasing as some of these have generated good historical returns. Chasing historical returns is a recipe for disaster. The retail investors who chased high historical returns in mid- and small-cap schemes and invested in them during 2017-18 are still licking their wounds. This problem gets aggravated in concentrated bets like sector and thematic funds. For example, investors who were lured to invest in IT funds in 2000 or infrastructure funds during 2007 lost heavily. One way to avoid getting enticed by historical good performances is to look at funds at the bottom of the performance list. For example, international equity funds that generated the maximum returns (18.02%) during the past one year, generated only 5.26% CAGR—the lowest category average returns—for the 10-year holding period whereas MNC Funds generated 15.54% in the past 10 years. So what is the reason for the erractic performance of sector and thematic funds? Most sector funds will be at extreme ends because they carry higher concentration risk. The market performance we get is the average of several sector performances.

Points for retrospection…

Investment horizon

You should consider an investment horizon of at least five years while investing in sectoral funds.

Selection of sector and entry exit

The selection of the sector is of paramount importance while investing in these types of funds. Refrain from investing in a sector which is overvalued. Besides, careful selection of entry and exit points is absolutely essential.

Track portfolio

Tracking portfolio is essential when you are making an investment in sector funds. You should invest time to review the portfolio and related news about the sector, bearing in mind the fact that every sector goes through a cyclical phase of rising and falling in the specific investment horizon.

Limit on exposure

If you are an evolved investor and want to invest in sector and thematic funds, the next question will be how much money you should park in these. This can be a difficult question because each investor gets in with different objectives. So, let us answer this question considering one objective at a time.The first set of investors get into thematic funds for diversification and investment into international funds is a good example of that. Once investors are through with diversified domestic equity funds, they should look at global equity funds before looking at other thematic funds. Since this is a broader diversification strategy, all investors with sizable domestic exposure should go for it. Ideally, investors can park around 10%-20% of their equity in international funds. The next set of investors gets into this space for enhanced returns. The commonly followed strategy is to have a ‘core portfolio’ of diversified equity funds and then enhance the portfolio returns by investing in ‘hot sectors’. This strategy is followed by investors with high risk-taking ability. Only evolved investors should try investing through sector funds and they also must restrict this exposure to 10% of their portfolio since the performance of these funds is not guaranteed and the chance of gaining and losing money both is high. Besides, they should make sure that the new sector they are adding is not already heavy in their portfolio. Sectoral funds are generally more volatile than diversified indices or mutual funds with a variable performance from period to period. While most retail investors can safely avoid such funds, those interested could toy with these funds with their satellite portfolio after fully appreciating risks.

…to keep lay investors at bay

Since investing in sector funds requires a keen understanding of sectoral cycles, first-time investors are advised to avoid them altogether. Investing in sector and thematic funds involves some amount of timing strategy—both for entry and exit. Therefore, they are meant only for evolved investors. It is better all investors, except those who have special knowledge about that sector, avoid sector funds. Sectoral knowledge comes with tracking a sector closely for years or from working in that sector. However, investors should also make sure that their ‘bias’ about a particular sector does not impact their investment decisions. Though sector professionals have an edge in terms of better knowledge, they will also fail if they are not able to control their bias.

Patience and understanding cycles pays in the long run…

Since sectoral or thematic funds come with higher risks, investments in these must be done only in accordance with the advice of experts or if the investors are experts themselves in understanding stocks and stock markets. Some of the sectors are cyclical and hence understanding these cycles becomes important as well. These business cycles can be short or long, depending on the specific sector. As timing of these investments and redemption plays a very important role in the returns being generated by such funds, a lot more careful analysis and planning is required before investing. One can also adopt different strategies with these funds, some for long-term growth (sunrise sectors/themes), some for medium-term tactical gains (cyclical/beaten down sectors) and some for defensive strategies. However, it is not advisable to allocate more than 10 to 20% of your investments to these funds. This 10 to 20% could be divided among two-three sectors or themes. You must remember that your other mutual fund holdings may also have some allocation to these sectors. Making large allocations to these funds can be risky and should be avoided by retail investors. Also, there are some sectors or themes that are coming in vogue or their business cycles are on their way up. These cycles can fully play out and reach their peaks in the medium term (three to five years) or can take even longer. Hence, not just knowledge of these cycles but also patience in allowing the cycles to fully play out is important.