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We often find investors getting drawn towards sectoral and thematic mutual funds—especially when a particular sector fund has outperformed the broader market by a significant margin in the recent past. However, many retail investors tend to rely heavily on recent performance data alone when making investment decisions, often without the tools or resources to conduct a deeper analysis.

But is it prudent to allocate a large portion of your investments to a single sector simply because of its recent stellar performance? Not necessarily. Let’s dig deeper, supported by historical data.

Historical Sectoral Performance: What the Data Says

WhiteOak Capital Mutual Fund, in their April 2025 Market Perspective, compiled the year-on-year performance of various sectoral indices dating back to 2012. A quick look at the data yields two key insights:

1. Top-performing sectors change frequently, with no predictable pattern.
2. A sector leading one year can underperform the next, and vice versa.

This makes it clear: Investing solely based on recent performance can be misleading. A sector that has delivered strong returns may underperform in the following years, and chasing past winners may lead to disappointment.

So, How Should Investors Approach Sectoral Funds?

Should you completely avoid sectoral funds? Or should you try to pick the worst performers in the hope of a turnaround? Neither approach is ideal.

Instead, investors can adopt a Core and Satellite Strategy, which offers a balanced approach to portfolio construction.

What Is the Core and Satellite Strategy?

The Core and Satellite Strategy involves dividing your portfolio into two parts:

1. Core Portfolio

• This forms the bulk of your investment—typically in diversified equity mutual funds or index funds.
• The focus is on long-term compounding, with minimal churn.
• These funds are aligned with your major financial goals (like retirement or child’s education).
• You do not need to take frequent buy/sell decisions with core investments.

2. Satellite Portfolio

• This is the tactical portion of your portfolio—used to express short- to medium-term views based on economic and market trends.
• Here, you can invest in sectoral or thematic funds, taking advantage of specific opportunities.
• The satellite component should be limited—usually between 10% to 30% of your overall portfolio depending on your risk appetite and market awareness.
• Requires active monitoring, with timely entry and exit based on changing macroeconomic indicators, interest rates, geopolitical events, and sector-specific news.

Guidelines for Investing in Sectoral Funds

If you choose to include sectoral funds in your satellite portfolio, keep the following in mind:

1. Set a clear limit—either as a percentage of your total portfolio or an absolute amount.
2. Make data-driven decisions—based on current sector outlooks rather than past returns.
3. Have a defined exit strategy—since overstaying in a declining sector can erode returns.
4. Avoid FOMO (Fear of Missing Out)—don’t invest just because a friend made money or the fund is trending.

Conclusion

Sectoral funds can be rewarding—but only when approached with caution and strategy. By combining them within a well-thought-out core and satellite framework, investors can benefit from sectoral opportunities without compromising the stability of their overall portfolio.

Disclaimer

Mutual fund investments are subject to market risks. Please read all scheme-related documents carefully before investing. The views expressed in this article are for informational purposes only and do not constitute financial advice. Always consult a qualified financial advisor before making investment decisions.

This article was refined with the assistance of ChatGPT, an AI language model developed by OpenAI.