sectoral trap

One can make a lot of money by being early in a trend but equally, one can lose a lot by being the last to jump in.

Unfortunately, most thematic or sectoral mutual funds tend to fall into the second category.

Let me explain: Suppose the auto sector in India has been performing exceptionally well. Auto stocks are surging, and for 6-8 months, the trend continues strongly. An investor watching from the sidelines starts feeling FOMO and wants to ride the wave. Around the same time, mutual fund houses noticing the frenzy begin launching auto-focused thematic funds, which invest only in auto stocks.

But here's the catch: these funds almost always launch in the last leg of a sector’s bull run. First comes the market frenzy, then the sector-specific fund. By the time retail investors enter through these funds, much of the upside has already played out or worse, a correction begins soon after.

Now comes the most important part:
In the last 14 years, there hasn't been a single instance where the same sector was the top performer two years in a row.

Here’s the data from 2012 to 2025:

From this, it's clear that no sector consistently outperforms year after year.

So, when you enter a sectoral mutual fund late:

• You often get lower returns than the actual sector delivered

• You buy at high valuations and stretched prices

• You face higher downside risk in case of a correction

Sure, if you have a high-risk appetite and a long holding period, thematic funds can have a place in your portfolio. But for most investors, they’re better off avoided.

Instead, consider following momentum-based investing. A momentum strategy can pick up sectors when they are strong and exit when they weaken, helping avoid long drawdowns or dead money periods.

Momentum investing makes sure you’re not getting married to any particular sector. All you care about is holding the best of the best. A completely non-discretionary approach.

That’s it for today!

– Manish