MFs betting on energy stocks offer eye-popping returns

Energy stocks have been rallying since the beginning of the year. Given the positive outlook, the energy sector funds have also been going up. The thematic mutual funds investing in energy stocks have offered 16.57% returns since Jan 1, 2021. Even though mutual fund advisors ask retail investors to stay away from thematic funds, these schemes have been attracting a lot of inflows. These schemes have offered an eye-popping 61.58% returns in one year.In the first two months of 2021, energy sector funds have seen huge inflows. However, the thing to note is that there aren’t many choices for retail investors in this category of funds. There are only two mutual fund schemes that invest in energy sector. Let’s look at their performance:Scheme name3-month returns (%)6-month returns (%)1-year returns (%)DSP Natural Resources and New Energy Fund23.7541.05 64.97Tata Resources & Energy Fund21.3236.53 64.26 Fund managers are positive on the energy sector and say that returns might continue to be lucrative. “These funds invest across different sectors like Oil & Gas, metals, chemicals, cement, power etc. Many of the sectors have room to grow over next 3-5 years. At the same time, shift in focus from growth to value stocks will also help these funds. Despite the recent rally, NIFTY commodities index is still less than 10% higher than its previous peak around 3-years back. We feel that there is still significant steam left in different sectors where this fund can invest,” says Satish Mishra, Assistant Fund Manager, Tata Mutual Fund. Mishra adds that improving global macros, weak dollar index and stringent environmental norms in China are supporting the sector. “The sector has structural leavers for mid to long term, like, chemicals are going to benefit from China+1 strategy, Natural gas will benefit from rising gas infrastructure in India, cement and steel will benefit from rising investments in infrastructure, re-rating of PSUs led by privatisation. Valuations of a few sectors are still significantly below its previous peak,” says Satish Mishra.Returns from the schemes can lure retail investors. However, mutual fund advisors say that investors should be cautious with these schemes. The fluctuations in the sector can cause huge volatility in these funds. Annual performance of these schemes is proof for the fluctuations:Scheme name2017201820192020DSP Natural Resources and New Energy Fund44.21%-14.65%5.40%32.89%Tata Resources & Energy Fund34.69%-13.97%11.40%32.89% Given the fluctuating nature of these schemes, advisors believe that investors should stay away from these sctoral funds. “Sector funds should be avoided and retail investors should prefer diversified funds over sectoral funds. Each sector has its cycles and then can remain flattish for quite some time. Often investors enter in sectoral funds after these funds had some sort of surge, like in energy funds, which sets wrong return expectations. Even the risk is high in sectoral funds because of their concentrated portfolio,” says Harshad Chetanwala, Founder, MyWealthGrowth, a financial planning firm, based out of Mumbai.Chetanwala believes that a diversified equity fund manager can also have higher weightage in sectors that look promising. So, investors should minimise risk and go for a diversified fund instead.

from Economic Times https://ift.tt/3uPXwYB