1. Quite a few investors use the SIP route to invest in sector or thematic funds, but SIPs are, in reality, a very sub-optimal way to invest in sector funds.
2. This is because sector funds, by their very nature, are designed to deliver returns for investors over short market phases of three-five years.
3. Stocks in a specific sector typically outperform the market when the sector is enjoying exceptional profit growth due to an upturn in the business cycle.
4. The market then uses this opportunity to re-rate the valuation multiples of such stocks.
5. However, after a three- or four-year spell of good returns, sector fads in the market usually fizzle out, and a big meltdown then follows, wiping out all the previous gains.
6. Investors in sector funds, therefore, need to get their timing exactly right to capture this outperformance, and need to invest when the sector is beaten down and exit when the fad is at its peak.
7. Using the SIP route, however, works against this process as the sector may be cheap when you kick off your SIP, but what's the guarantee that stock valuations won't run up even as your SIP is continuing?
8. The other problem with SIPs in sector funds is that by putting your decisions on autopilot, they take away your incentive to track the markets closely.
9. This can deplete your returns in sector funds as the sector may have peaked out and head downhill before you know about it.
10. It is, therefore, better to scrounge up the lump-sum money you can and invest it in these sector funds when you feel they are down.
11. But if you lack the conviction to make this big bet, it is best to avoid sector funds altogether and stick to diversified-equity funds.
12. There's no point in opting for a high-risk investment and then trying to hedge your bets!