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How about graduating to sectoral investment?


   IN A bull market, there are certain sectors that outperform broader markets. If you are overweight on such themes or sectors, it may give added drive to your portfolio. The attempt is to outperform the broader market by increasing the weight of a sector or theme over and above the weight allocated by the diversified equity fund portfolio. Of course, there are tradeoffs. If the call goes wrong, there is a risk of capital loss in the worst case. Given the higher risk, sectoral investing is only for those who have graduated from investing in diversified equity funds that investors invest across sectors. 

   Clearly, 2010 is going to be a year of stock pickers as none of the experts are betting on a rally as broad based as in 2007. Picking stocks is one thing and needs intricate analysis. However, the smarter mutual fund investors want to identify sector bets and leave the stock picking within the sector to fund managers. Here are some savvy choices:

INFRASTRUCTURE

As the government completes one year in early 2010, it is highly likely that the infrastructure investments would gather pace. This will benefit companies in core infrastructure, capital goods, equipment financing, power, cement and other ancillary service providers. Infrastructure has been limping and the government is likely to give a fillip to infrastructure during the year. This could mean good days for investors in infrastructure funds. Infrastructure funds are expected to deliver handsome returns, as the companies' topline and bottomline surge in sync with the infrastructure boost. Any slowdown in government investments in domestic infrastructure, or an unfavourable policy change is the risk to watch out for.

DOMESTIC CONSUMPTION

Post elections, the domestic consumption theme on the back of reforms story became popular. Going forward, the fruits of GDP growth are expected to percolate down and boost consumption. "Domestic consumption theme will unfold over a long period of time as India continues on the economic growth path" says Vinod Ohri, president — equity, Gupta Equities. FMCG, organised retail, telecom, media and entertainment are some of the sectors that would benefit from this buzz.

EXPORT-ORIENTED BUSINESSES

Though the world was rather cautious about the US and other developed economies in early 2009 on account of recessionary trends, in the recent months, IT and other export-oriented sectors have shown a good move. The markets are willing to discount the possible growth in FY11 as the IT budgets of corporates in developed nations swing back to normal. The second candidate in the segment is pharma. Indian pharma companies earn a good amount of revenue from exports. Pharma is a good investment bet during volatile times. Any economic slowdown in the US and currency risk are key risks faced by export-oriented companies.

COMMODITIES

If you believe that emerging economies will record high growth and also that the US and other developed economies will get on the road to recovery, commodities will invariably benefit. As the commodity consumption goes up, prices of commodities shoot up. One way to play the commodity boom is to invest in the commodity-producing companies. There are commodity funds available. Economic slowdown is a risk that commodity producers face. On the back of infrastructure spending in emerging markets, commodities are expected to do well. However, investors have to be selective in their approach.

GLOBAL INVESTING

Asia and Latin America are expected to drive the global growth. India and China are expected to lead the world growth from the front. Commodities should do well during the second half of the next year and hence, I would recommend investment in emerging markets and Latin American Funds. 

   Asian and Latin American economies compliment each other as Asian countries are primarily commodity consumers whereas the Latin American companies are commodity producers. Currency risk and geo-political risks are key risks one should bear in mind while looking at such opportunities.


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