The fund launch on October 27, 2023, has again set the stage for investors to inquire about the validity of investing in NFOs, especially, when they pertain to themes like these.
No doubt, some thematic funds have helped investors create the much-desired wealth. However, not all of them have helped investors to further the gains in their investment portfolios.
CA Kanan Bahl, a Finance Educator and Growth Consultant shares, “Even though corporates and the government are investing heavily in the logistics sector, I keep my investments simple, I prefer staying away from thematic funds. However, this is not an investment advice. One should consult their SEBI RIA before taking any decision.”
Does the logistics sector hold promise in the coming times?
The recent geopolitical tensions and anticipation of a new world order have put the focus back on the current supply chains available for use. and more supply chains are getting clogged due to war-like situations and an increasing number of countries collating with each other to participate in the recent Israel-Hamas and Russia-Ukraine fiasco. With new routes being planned to ease the transportation of supplies and old routes being reworked to ease receipt of essential aid and materials, many investors are inclined to know if this is the right time to invest in a sectoral theme based on transportation and logistics.
Preeti Zende, Founder, Apana Dhan Financial Services shared her outlook on the logistics sector in the coming times. She said, “The transportation and logistics sector can be one of the growth sectors in the coming decade. The government is taking a lot of initiatives such as forming a National Logistics Policy, launching a digital platform called – the Open Network for Digital Commerce (ONDC), and building cargo and freight corridors and multimodal logistics parks. All these steps along with the introduction of the Unified Logistics Interface Platform (ULIP) for logistics companies are taken as a part of making India a global hotspot for logistical services that provide high-quality services.”
A continued push by the government in the logistics sector has spelled optimism among the general citizens, especially, investors looking to make the most out of putting their money in this fund. “Because of all these steps and initiatives, we can see a steady year-on-year growth of 10 per cent to 12 per cent in the transportation and logistics sector. These sector-based companies can surely benefit due to the government’s focus on infrastructural development. However, as these are capital incentive products you have to have a long-term view if you want to have a sectorial bet in your portfolio. You can add these stock or sector-based mutual funds only as a satellite portfolio that too, some percentage of allocation with a long-term view,” added Zende.
Should you invest in a sectoral fund?
Not all mutual fund investments are worth your choice. Every investor goes through the rigmarole of deciding the validity of investing his or her earnings before deciding when, where, and how to invest his or her earnings. A lot depends on how investors perceive their investments. How they categorize their investments is another deciding factor when deciding how much money to allocate to a thematic fund.
Nilesh Naik, Head of Investment Products, Share.Market (PhonePe Wealth) said, “Investors should typically look at their mutual fund investments in two parts – core holdings and non-core or tactical holdings. Thematic funds such as this can be part of non-core / tactical holdings in the portfolio which typically should not exceed 20-25 per cent of one’s overall mutual fund portfolio. Such a fund may be suitable for relatively experienced investors who have their core portfolio in place, have a very high-risk appetite, and hold a strongly positive view on the future prospects of the fund’s investment theme.”
The transportation and logistics industry’s outlook holds promise, driven by technological advancements and the expansion of global trade. However, it’s crucial to acknowledge that these sectors can be susceptible to economic downturns. Consequently, a wise investment strategy involves building a foundational portfolio that is primarily comprised of a diverse range of sectors. This strategy offers stability and helps manage risks by providing exposure to a wider spectrum of the market.
Gaurav Goel, Founder – Director, Fynocrat Technologies explained, “For those with a higher risk appetite and a tolerance for heightened volatility, considering an allocation to sector-based funds centred around transportation and logistics can be advantageous. This strategic addition allows investors to capitalize on the sector’s growth potential. However, it’s crucial to maintain a diversified portfolio to mitigate potential downsides during economic downturns while capitalizing on the sector’s upside potential.”
Echoing similar views on the idea behind investing in a sectoral theme based on transportation and logistics, Atul Parakh, CEO, Bigul furthered, “Astute investors drawn to the dynamic and progressive nature of transportation and logistics sectors are catered to by sectoral funds with a transportation and logistics theme. These funds especially appeal to imaginative people with a propensity for growth and innovation. They are perfect for people who understand the critical role of effective logistics in the global economy. These funds cater to discerning investors who are looking for exposure to a particular industry and have an understanding of the cyclical nature of the transportation sector.”
Deciding the investment tenure
Time is the most underrated element in any investment made. You cannot decide where to invest unless you know how long you wish to stay invested in a particular opportunity. Any investment when continued for a long time earns viable returns that help investors amass the desired wealth in the long run. Apart, continued investment through systematic investment plans (SIPs) ensures disciplined investment behaviour.
Dr Rajendra K Sinha, Professor & Chairperson, Centre of Excellence in Banking – JAGSoM elucidated, “A sectoral fund operating in a specific sector carries concentration risk of the sector. To mitigate the higher risk levels, the investor will inevitably remain invested for a relatively longer period of at least five to seven years. Sectoral funds are not intended as short-term returns providers, but rather leverage from economic/ socio-economic and demographic events in a relatively longer period.”
Are you ready to ride the cycles in the market? This question is important for anyone and everyone yearning to earn from the frequent highs and lows in market-linked investments but do not have the necessary risk appetite to do so.
Dr A.V.Arunkumar, Associate Professor and Director, Centre for Banking Development and Financial Studies – RV University added, “The sectoral mutual funds lack risk diversification benefits and therefore, reaping returns is largely a function of learning the art of exposure management through entry and exit, including, perhaps, investments in counter-cyclical funds. The funds require a closer analysis from the perspective of cyclicality. Maybe a period of medium to long term would work as a natural mitigation in terms of time, and it may significantly vary depending upon the economic cycles. The takeaway would be to limit the exposure, sector switching, and investment in negatively correlated counter-cyclical sectors and develop a forward-looking approach to the economy as such. This would ensure optimal returns.”
Should you rely on the “Transportation and Logistics” theme?
Participants in road logistics face potential environmental and social challenges. Stricter regulations on emissions require investments in alternative fuel vehicles or upgrades to existing fleets. Additionally, logistics players face the possibility of legal actions and penalties related to harmful emissions and waste, which could result in financial consequences and damage to their reputation.
Apart, the thematic nature of the fund points to less diversification and more emphasis on stocks of companies in one sector alone. Suresh Sadagopan, Founder, Ladder7 Financial Advisories shared, “Quite apart from geopolitical issues and wars, I would not suggest anyone invest in the transportation and logistics fund. It is too specific a niche. It may be a much better idea to invest in a diversified fund where some companies from this sector would also be there.”
The transportation and logistics theme is not a new addition to the sectoral or thematic fund category. Many asset management companies (AMCs) have launched similar funds in the past. Most of these funds have performed decently though they may not have outperformed funds about other sectors like banking, healthcare, information technology and more.
When asked if this thematic fund must be included in one’s investment portfolio, Basavaraj Tonagatti, a SEBI-registered investment advisor and founder of Basu Nivesh suggested, “From my perspective, it’s generally wiser to steer clear of thematic funds. This is primarily due to the inherent difficulty in accurately forecasting future themes, regardless of one’s expertise. Therefore, instead of chasing after a particular theme, I strongly advocate for holding diversified funds.”
Should you participate in an NFO?
any layman investors feel ecstatic while investing in any NFO believing that investing at a lower net asset value (NAV) would benefit them as they buy units at cheaper rates. Though this helps in the long run with increased prices of mutual fund units, jumping into an NFO for this reason alone may not help. Moreover, with so many funds operating in a similar domain, it would do a lot of good if investors could compare the existing funds’ performance over the past 10 years or more to gauge their risk profile, stability, and ability to continue earning returns, irrespective of sudden market downturns.
Rishabh Parakh, Chief Play Officer, NRP Capitals explained, “Never invest in a sectoral fund unless you are doing it based on your risk profile. Sectoral funds come with a high-risk-reward proposition and timing the exit if you make a good profit when the sector outperforms is extremely important apart from having the patience to stay silent when the sector remains stagnant for years together.”
The recent data shared by the Association of Mutual Funds in India highlights more people getting interested in market-linked investments. While this may be termed a good move on investors’ part as they move on to market-related investment opportunities more than their traditional counterparts, trying to jump into every NFO may not help. The fear of missing out on opportunities does more harm than good, which is why a prudent approach to investing is always recommended.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
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Updated: 31 Oct 2023, 05:24 PM IST