Sundaram Services Fund – should you invest?

I have always been against investing in sector and thematic funds, unless one can time the entry and exit correctly in such funds. Infra funds are a case in point where investors who entred in 2007 peak have earned barely 5% returns in last 10 years. Pharma is another sector that was favourite amongst investors few years back, but has performed poorly in last 3 years clocking negative returns.

The story is not always gloomy though, few sectors have been consistently doing well. FMCG and banking sector funds have rewarded investors well over last few years. However, these sectors too have seen cyclicality and only one who stayed put through these cycles have earned rewards.

In nut shell, sector and thematic funds have painted a mix picture and it is better for a lay investor to be in diversified fund than a sector fund.

Coming to Sundaram Services Fund:

What’s good about it?

  • A unique theme where the fund will invest in service sectors in India. Service sector is bound to grow at a handsome pace given multiple opportunities and huge population in India.
  • A good diversification within this theme is available. Within services there are 15 sectors and companies available across market caps. This reduces some cyclicality in performance as different sectors can provide counter balance and aid performance.

What’s not so good about it?

  • Services theme portfolio shall have major exposure in financial services which is at its peak valuation today, unless FM takes a brave call to invest in PSBs.
  • The timing of the fund seems to be near the peak of the theme – 5x returns already in last 10 years says the advertisement.
  • Very few bright spots in the theme today in terms of attractive valuations.
  • The benchmark of the fund is bse 200 which seems unusual for a thematic fund. High probability that it will have huge deviations from the benchmark and assessment of performance shall become difficult.
  • The riskometer says moderately high risk which is wrong, its a high risk sector/theme fund. Remember that!

To conclude it is better to avoid this fund. If you still want to invest SIP shall be the best route to avoid getting caught in a wrong cycle.

Secret: 90% of the times diversified multicap funds have outperformed sector/thematic funds in last 15 years. Analysis based on 5 years rolling returns comparison between sector/thematic funds and multicap diversified funds.

So think before you invest!

Happy Investing!

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