Is this recipe for buying high and selling low?
In this issue:
» Will the Lokpal bill bring in better reforms?
» Banks can earn billions with cost savings
» Why the RBI should be very careful with new bank licenses...
» Are crude prices headed lower?
» ...and more!
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Infrastructure related stocks and funds became investors' delight after the Planning Commission charted out mega outlays for the 11th plan period (2007-2012). The US$ 500 bn of investments planned for this period in sectors ranging from power to roadways to cold storages painted a rosy picture for prospective investors. However, as the plan period heads closer to conclusion; the targets are far from being met. Policy inaction, problems in land acquisition, funding constraints are amongst the many hurdles that have brought India's infrastructure dreams to a standstill. In the bargain, the investment returns in the sector have dwindled. The Planning Commission has yet again been ambitious enough in targeting GDP growth of 9% and investment outlay of US$ 1 trillion for the 2012-17 plan period. However there are no takers for these targets this time. In fact the infrastructure dedicated funds from the stable of the top mutual funds in India have lost between Rs 4 bn to Rs 9.5 bn by way of redemptions in the last 12 months. Not to mention that some infrastructure related stocks are trading close to 52 week lows. What does this trend indicate? That investors tend to buy sector specific themes at high valuations and sell them when valuations are at historical lows. Isn't this just the opposite of what an astute value investor should do?
We suggest that whether it is stocks or mutual funds investors would be better off staying away from sectoral themes. Most if these over hyped themes bring little value to the table for investors. More importantly investors tend to overlook long term fundamental strengths and weaknesses in the sector thanks to the herd mentality. The bottom up approach to picking stocks with sound fundamentals and cheap valuations is the safest bet to avoid such blunders.
Do you think sector dedicated funds create value for investors in the long term? Share your comments with us or post them on our Facebook page.
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04:50 | Today's investing mantra |
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6 Responses to "Is this recipe for buying high and selling low?"
Ramanand
Sep 4, 2011Investing through sector specific funds is a surefire recipe for disaster. As Mr. Ganapathy stated above, the sector specific fund starts exactly when the stocks start getting overvalued. The example given by Mr. Sunilkumar above is impractical since no sector specific fund bought Unitech in 2004, and absolutely no Infra/Realty fund sold Unitech in 2007 at 545. You could have made money in Unitech only if you were a privileged insider. Hence, if you are looking at Mutual funds as a mechanism to invest into markets choose only large-cap well-diversified funds and maybe 10-20% of portfolio allocation to diversified mid-cap funds.
shome suvra
Sep 1, 2011In India due to the fact that the different sectors are positively correlated owing to macroeconomic influence bottom up approach is the suitable one. Taking the infrastructure sector separately, public private partnership is one of the suitable ways though foreign borrowings may not be found cheaper due to huge capital requirements in the western economies.
sunilkumar tejwani
Sep 1, 2011Sector specific funds can create value, provided the investment is done at a nascent stage, for example Uni tech (a real estate company) in 2004 was quoting around rupees 1.50 -2 (ex-bonus & ex-split basis) in 2007 went up to 545, gave multifold returns. Moral of the story, one should identify investment themes at a nascent stage & exit when every body is trying to get in to it.
Otherwise for a lay investor it is better to invest in diversified blue chip stocks without running behind sector specific themes.
Ranjith Menon
Aug 31, 2011The best time to invest in a sector fund is when the whole sector is in deep trouble as mean reversion will ensure better times ahead.
By the above logic, the sector funds to buy now will be banking and infrastructure!
Ganapathy Sastri
Aug 31, 2011Just watch for Mutual Funds coming in large numbers to start a sector specific fund. That is an indication of the likely collapse of the sector. In 2000 MF after MF started Technology Fund. One ( Chola) converted a diversified fund to a Tech Fund. In 2007 fund after fund started Realty or Infra Fund. In 2011 every one of them is starting GOLD FUND. Is it time to bail out of gold?
As for investors just entrust your money to a DIVERSIFIED FUND.
Mohd Azizullah Ahrari
Sep 5, 2011A very educative wrap-up.Thank you for putting us wise.Aziz