In the last one month, domestic stock markets have experienced a significant decline due to weak Q2 results and substantial selling by foreign investors. The Sensex and Nifty have dropped almost 10% from their highs, leaving investors uncertain about the best course of action during this market downturn.
Despite the challenges, the mutual fund industry saw a new record high in October, with assets under management (AUM) reaching Rs 67.3 trillion. This achievement was supported by unprecedented inflows of Rs 2.4 trillion, including substantial investments in debt funds and passive funds.
Industry analysts believe that the rise in inflows into active equity schemes can be attributed to savvy investors making strategic one-time investments to take advantage of market corrections.
Shriram AMC has introduced a new fund that utilises a quantamental strategy, blending quantitative and fundamental analysis, to invest in up-and-coming sectors. The objective of the NFO is to capitalize on sectors showing strong momentum while limiting exposure to underperforming sectors. The Shriram Multi Sector Rotation Fund’s NFO will remain open until December 2.
In recent years, sector-focused mutual fund investing has gained popularity, with the number of such funds increasing twofold over the past five years to approximately 190, and assets under management growing eightfold, as stated in the NFO brochure.
The fund will select sectors from the NSE-500 as per AMFI guidelines. These sectors will then be assessed using a quantitative model to identify those showing positive momentum, earnings expectations, volatility, and other relevant factors. The chosen sectors will undergo further evaluation through fundamental analysis, considering macroeconomic indicators, investment indicators, sentiment, and related commodity trends. Ultimately, the fund aims to narrow down its selection from 19-20 sectors to invest in 3-6 sectors.
Following sector selection, a quantitative and fundamental approach will be utilized to identify top stocks within each sector. The fundamental analysis at the stock level will emphasize quality, management, risk, valuation, and technical factors. Initial investments may focus on Healthcare, Consumer Services, Consumer Durables, IT, FMCG, or Financial services.
To navigate these complex market conditions, Deepak Ramaraju, Senior Fund Manager at Shriram AMC, offers valuable insights in an interview with Business Today on how to proceed in the current market scenario.
1. Thematic and sectoral funds often experience periods of boom and bust. What are some common pitfalls investors face due to the cyclical nature of these funds, and how can they avoid FOMO-driven decisions?
The last 10 years have been phenomenal with respect to the growth of sectoral/thematic funds. AUM for this category of funds increased to Rs 4.67 lakh crores in FY25 (till September) versus Rs 0.19 lakh crores in FY 14, more than 20 times. The number of funds also increased three times over this period to 187 at present. As per October 2024 AMFI data, sectoral/thematic funds witnessed the highest net inflow of ~ Rs 12,000 crores among equity-oriented schemes.
Fears of missing out (FOMO) approach can prove to be quite risky for investors as the high return delivered by these funds during the underlying sector’s uptrend should not be extrapolated. If done so, the sector funds, being cyclical in nature, may result in sector traps where investor money remains stuck.
To avoid this common problem, we have launched Shriram Multi Sector Rotation Fund (NFO date from November 18 – December 2, 2024), that will invest only in top 3-6 trending sectors. Here, we will rotate money from one sector to another when the sector trend changes. This will not only provide the optimal diversification across sectors, but may also make it possible to avoid sector traps and is tax efficient when compared with switches done by individual investor.
2. How does diversifying investments across multiple sectors contribute to effective risk management, especially during volatile market phases?
Typical sector funds have high concentration risk due to their exposure to a specific sector. As a result, anything negative with that sector can prove quite risky for the investors. However, in case of diversification across sectors, the pitfall of one sector can be mitigated by out performance of other sectors. Hence diversification across sectors enable investors to sail through market volatility. In Shriram Multi Sector Rotation Fund we will have a focused diversification as we will be investing in top 3-6 trending sectors rather than broad based diversification. If we do broad based diversification, then the purpose of sector fund or thematic investment strategy is defeated.
3. Can you explain how the multi-sector rotation strategy helps investors diversify their portfolio and adapt to changing market conditions?
As per AMFI classification, companies can be categorised under 22 sectors. Not all sectors move simultaneously and the uptrend in some sectors will occur along with downtrend and sideways movement of other sectors. The basic principle of multi-sector rotation strategy is diversification across these sectors and investment in the trending ones. As a result, the portfolio will be invested in trending sectors based on the underlying market conditions to generate better returns and avoid the primary pitfall ofthe sector trap.
4. The fund uses a quantamental strategy that combines quantitative models with fundamental analysis. Can you elaborate on how this approach has advantages over traditional methods?
The investment strategy of Shriram Multi Sector Rotation Fund is a two pronged one. The first one involves the proprietary Enhanced Quantamental Investment (EQI) model to select the top 3-6 trending sectors. The selected sectors will then undergo thorough fundamental evaluation to understand the rationale behind the choice. Typically, sectors that feature in the top can be owing to any of these factors such as good earnings expectation, attractive valuation, favourable government policies etc.
Once the sectors are finalised, the EQI model is run on stocks of the selected sectors only to arrive at the initial portfolio. Once again, this portfolio undergoes fundamental evaluation to make its way to the final portfolio. The combination of quant and fundamental techniques for portfolio construction involves the positives of ‘human mind’ and ‘machine’. The result is the ability to avoid emotional bias, being agile in the sector selection process, though not without confirming the rationale behind.
5. How does a fund focusing on trending sectors align with long-term wealth creation goals for investors?
Investors with long-term wealth creation goals should opt for exposure to different sectors. Shriram Multi-Sector Rotation Fund, by virtue of its investment strategy, will invest in the top 3-6 trending sectors with an aim to generate long-term capital appreciation and avoid the pitfall of any sector trap. Hence, this type of fund may be considered by long-term investors.
Disclaimer: Views expressed herein cannot be construed to be a decision to invest. The statements contained herein are based on current views and involve known and unknown risks and uncertainties. Any reliance on the accuracy or use of such information shall be done only after consultation to the financial consultant to understand the specific legal, tax, or financial implications. Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.