Extended celebrations of impressive victory of NDA would soon be over. The newly elected Government is expected to boost economic growth. Fast-tracking of big infra projects, revival of manufacturing sector, boost to export oriented industries are some of the priorities of the new Government. Hoping some real action from this government and expecting strong economic revival, investors have raised their exposure to sectors which would benefit from economic recovery. Mutual funds are no exceptions to this.

Over last 4 quarters, it is observed that mutual funds have raised their exposure to cyclical sectors such as construction, engineering, banking and automobiles among others. On the other hand, weightage of consumer non-durable sector is constantly dipping in the portfolios of mutual funds.
 

Mutual funds turning less defensive by lowering exposure to consumer non-durables

Data as on May 27, 2014
Equity component of schemes launched by all mutual fund houses has been considered
(Source: Ace MF, PersonalFN Research)  

As a continuation of the trend, mutual funds have further slashed weightage of the sector in April 2014 to 6.70% from 6.98% in March 2014. You might be thinking, why consumer goods companies are being less favoured, especially considering more job creation and more discretionary income would create more consumption demand.

Well, persistently high inflation has not only made consumer goods expensive (as input costs have gone up), but is also eroded savings of people. Due to this, companies focusing on consumer non-durable goods have come under pressure. While they may be beneficiaries of economic revival as more discretionary income may lead to more consumption; the valuations at which these companies are quoting seems to be a concern for mutual funds.

A few years ago, equity markets were jittery. Cyclical businesses were doing rather badly. On the other hand, companies belonging to consumer non-durable sectors looked stable. Under such a scenario, mutual funds preferred to stay with businesses having stable earnings and thus invested aggressively in consumer companies. But now, it seems that the theme has lost its flavour. Expensive valuation of consumer goods companies, relatively flat growth and attractive valuations in many cyclical sectors along with hope of a strong recovery have made mutual funds go bullish on cyclical companies.

But will this move pay?

Mutual Funds are managed by professionals who bring with them years of experience. Process oriented mutual fund houses give emphasis on thorough analysis of economic situation and analysis of company specific factors. Combining findings of analysis in these two areas, stocks are shortlisted. Although this is a usual process which is common across many fund houses, there are exceptions. A few fund houses, take aggressive calls depending on market momentum. They churn portfolios and try to generate superior returns without giving much importance to risk management. Therefore, PersonalFN believes those who have been betting on market momentum and moving away from consumer non-durable sector and investing in cyclical companies may still lose. On the other hand, those who have carefully identified opportunities and have put in place effective risk management processes may gain.

PersonalFN believes one may not have to invest in a sector or a thematic fund to benefit from opportunities emerging in a particular sector. A diversified fund, or specifically an opportunities fund, would do the job for you. However, as said earlier, you need to identify funds that are well placed to benefit from opportunities and have a proven track record. Through various research services such as Fund Select and Fund Select Plus, PersonalFN has helped several investors identify rewarding mutual funds for their portfolio and created wealth for them. Moreover, funds which one should avoid investing in have also been covered in our research reports to timely apprise investors and prevent wealth erosion. You see the unbiased and independent advice, is what makes us different and respected institution that helps investors achieve their financial goals and aspirations.


Do you think it is a right move by mutual funds to shift exposure from defensives to high beta sectors? Share your views here.

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