Banking stocks were among the top performers for the year 2012. The banking indices—BSE Bankex and CNX Bank Nifty—delivered a return of over 40%, taking them to the top of the list of sector indices. The stocks of fast-moving consumer goods (FMCG) companies have performed exceptionally well over the past few years. Stocks from the media and entertainment sector also did reasonably well, largely because of the digitisation of cable television and raising of the foreign direct investment (FDI) limit. With the benefit of hindsight, sector fund schemes investing in these sectors yielded reasonably good returns.

There are as many as 56 sector schemes, of which six invest in the banking sector. Among the list of top 10 sector fund schemes, six are banking schemes. These schemes delivered an annualised monthly mean return of 43.15% over the one-year period ending 25 December 2012. ICICI Prudential Banking and Financial Services Fund topped this list with an annualised return of 51.29%. HDFC Bank and ICICI Bank are the top two picks of all the banking schemes. Apart from these two banks, the scheme from ICICI Mutual Fund also invests in State Bank of India, Indusind Bank and M&M Financial Services. Reliance Banking Fund is next on the list with a return of 44.65%. Bajaj Finance, State Bank of India and Federal Bank are among its top picks. Religare Banking Fund delivered a return of 42.86%. Its top picks include Axis Bank, J&K Bank and Karur Vysya Bank. How this category of schemes would perform in 2013 would depend on the interest rate policy review by the Reserve Bank of India, expected in January-end and the asset quality of the banks.

There are just two FMCG schemes among the sector schemes, underlining the fact that the fund houses, by and large, failed to foresee this opportunity. SBI Magnum FMCG and ICICI Prudential FMCG delivered a return of 44.23% and 34.01%, respectively. Both schemes were launched over a decade ago and have a combined corpus of just Rs385 crore. Even over the long term, FMCG schemes have performed well. But did they perform as well as they could have? From an analysis we did a few months ago, we found that the fund management strategy of these schemes is marked by less of stock selection and weighting and more of investing in stocks that have a higher market-cap. Hence, we see ITC, Hindustan Unilever, GlaxoSmithKline Consumer Healthcare and Marico among the top picks which command nearly half the weightage of the schemes’ portfolio. FMCG stocks have run up a lot over the past few years and it would be interesting to see if these stocks are able to sustain the rally.

Reliance Media & Entertainment Fund and Sundaram Media & Entertainment Opportunity Fund delivered a return of 44.57% and 32.31%, respectively. These are the only two schemes which invest mainly in the media & entertainment sector. A few months back, the government made digitisation of cable television mandatory in metros. Other cities have been mandated to go for digitisation by March 2014. Along with this, the government’s decision to raise the foreign direct investment (FDI) limit to 74% (from 49%) in broadcast carriage services has been beneficial for the cable TV sector. This would help in opening up the sector and speeding up the pace of digitisation. With the deployment of new technologies, revenues from subscribers are also expected to increase. However, this sector has shown high volatility in the past and carries a lot of risk. The two schemes combined have a corpus of just over Rs100 crore.

The returns of pharma schemes were excellent, but subdued, compared to the two sectors described above. The three pharma schemes delivered an average return of 29.43%, while the CNX Pharma index delivered a return of 28.97%. It is also pertinent to note that the pharma schemes had the lowest volatility compared to other sector schemes. SBI Magnum Pharma Fund delivered a return of 33.49%. The top three picks of this scheme include Sun Pharmaceuticals, Dr Reddy’s Lab and Lupin. The other pharma schemes are Reliance Pharma Fund and UTI Pharma & Healthcare Fund which delivered a return of 31.40% and 23.40%, respectively.

Sector schemes are, by and large, cyclical in nature. Therefore, investing in a ‘hot’ sector may lead to disappointing returns if the investment is not done at the right time. Investors usually tend to get in when the market is doing well and at a high valuation. When the market falls, they get disappointed and withdraw their funds. Fund houses have played on this weakness of investors and have launched technology funds when the IT sector was booming, infrastructure funds when the infrastructure sector was doing well and gold funds after gold delivered great returns. Investors would have got lured by these high-growth stories and invested, unaware of the risks associated.

Infrastructure schemes have been one of the worst-performing sector schemes of the past. There are as many as 21 infrastructure schemes, many of which were launched when the sector was ‘hot’. These schemes delivered an average return of 20.73% in 2012, after years of poor performance. The top scheme of this category—Franklin Build India Fund—delivered a return of 31.13%, but over 10% of the portfolio is allocated to FMCG stocks and nearly 20% is invested in the financial sector! At the bottom of the list was IDFC Infrastructure Fund with a return of 7.96%. UTI Infrastructure Fund and ICICI Prudential Infrastructure Fund, which have a fund corpus of nearly Rs2,000 crore each, delivered a return of 25.16% and 20.43%, respectively. The infrastructure sector is riddled with an array of problems: policy paralysis in government, bottlenecks in funding and a high interest rate scenario are just some of these.

Schemes investing in public sector units (PSUs) delivered a return of just 10.36%. Most of these were launched in 2009-10. Religare PSU Equity Fund led the list with a return of 13.73%. Its top three picks include ONGC, Power Grid Corporation and J&K Bank.

At the bottom of the sector schemes list are technology schemes. The five schemes of this category delivered a return of just 5.23%. The BSE IT index delivered a mean return of -2.17%.  Some of these schemes were launched during the technology boom, in 1999-2000, and it did not take long for the sector to come crashing when the bubble burst. The Indian IT growth rates have been slowing down over the past one year. Spending on technology has been weak in the US. ICICI Prudential Technology Fund delivered a return of 15.45%, much higher than those of other schemes in the same category. The top three picks that constitute more than half its portfolio are: Infosys, MindTree and Oracle Financial Services Software. Franklin Infotech Fund, with a corpus equivalent to that of the ICICI Fund, delivered a return of -0.73%.

Sector schemes tend to be more volatile than large-cap or multi-cap equity diversified schemes. For the average retail investor, choosing consistently performing equity diversified schemes would be a safer option.