Are you investing in these sectors? Metal, IT, Realty, Banking

This article analyses the performance of various sectors in the last one year and explores why the metals and IT indices have outperformed the rest.

Metals and IT sectors outperform: Should you bet on them?

In the second half of 2020, the overall market bounced back sharply after the big fall due to COVID-19 in the first half. In 2021, the market recovered all the losses of 2020 and went on to hit a new high. While the overall market has done well in 2021, the difference is between how various sectors have performed. 

If you had invested in the broad market index in the last one year, you would have made decent returns. However, if you invested in specific sectors such as metals, IT, etc., you would have made outsized gains. This article will analyse the performance of various sectors in the last one year and see which ones created wealth for investors. We will also understand whether the outperformance is likely to continue in the future as well.

One-year performance of sectoral indices

Let us start by analysing how the various NIFTY Indices performed in the last one year in terms of returns.

Table: One year performance of sectoral indices
 

Table: One year performance of sectoral indices

The above table shows that the metals, IT, and realty indices have been the top three outperformers. Apart from these three sectors, the financials have also done well. The next four indices are all related to financials.

Related: Aftermath of COVID-19: Which sectors will struggle, which won’t

Let us discuss the outperformance of the top two indices.

NIFTY Metals index

The metals index has been the best performing sectoral index in the last one year, giving returns of 116%. The shares of commodity companies, which are part of the metal index, did well due to the strong global demand for metals. 

The demand for metals has gone up due to the pick-up in economic activity across the globe, stimulus packages announced by governments, liquidity released by central banks, decarbonisation initiatives taken by China, etc. While the demand for metals has gone up, supply has not been able to keep pace, resulting in metal prices going up.

Prices of various metals such as steel, copper, aluminium, zinc, coal, etc., are trading at multi-year highs. As a result, listed metal companies have benefited, leading to the metal index going up and becoming the best-performing index in the last one year.

NIFTY IT Index

The NIFTY IT Index is the second best-performing sectoral index in the last one year, with returns of 89%. Due to COVID-19 lockdowns, the demand for IT services went up a lot. People are working from home, shopping from home, availing of various services from home. And IT has a big role to play in all these activities. 

With the demand for IT services going up, the listed IT companies have announced good financial results, big-order wins, and a strong deal pipeline for the future. As a result, the shares of IT companies have gone up, leading to the IT Index becoming the second-best performing sectoral index.

One-month performance of sectoral indices

In the above section, we saw the one-year performance of the various NIFTY Indices. Next, let us look at the last one-month performance of these NIFTY Indices.

Table: One month performance of sectoral indices

Table: One month performance of sectoral indices

As seen in the last one month, the IT sector is the top performer. The metal sector barely managed to give positive returns, and the realty index corrected by 5%.

Related: What are sectoral and thematic funds, and which one should you buy?

Will the metals and IT sector continue to outperform?

It is very likely that the metals and IT sector will continue to do well in the future also. The demand-supply mismatch for metals is likely to persist, which will keep metal prices higher. Higher metal prices will lead to higher profits for listed metals companies, which will, in turn, benefit their share prices. 

IT companies have announced big multi-year deal wins in the last one year. They have also announced a strong order pipeline for more such new deals in the future. So, the IT sector is also likely to continue to do well in the future.

How can you benefit from the outperformance of sectoral indices?

As a retail investor, you can benefit from the outperformance of sectoral indices by investing in sectoral mutual fund schemes. Following are the top IT and commodity sectoral mutual fund schemes.

Top 5 IT sectoral funds

Top 5 IT sectoral funds

Top 5 metal funds

Top 5 metal funds

Note: The above returns are as of 25 Aug 2021. The returns are for direct plans with growth option. The funds have been ranked based on one-year returns.

So, if the IT index (89%) and metals index (116%) have given high returns in the last one year, why are the returns of the sectoral mutual funds not matching with them? To answer that question, you need to understand that all of the above are active funds. The fund manager doesn’t have an obligation to invest in shares of all the companies that are a part of the sectoral index in the same proportion as their weightage. Because of this, there is a big variation between sectoral index returns and sectoral mutual fund returns.

Related: 4 Reasons to stay invested in SIPs even during the pandemic

Asset allocation is the key

In the last one year, the IT and metals indices have given excellent returns. They may continue to give good returns in the future also. However, you should not have too much exposure to sectoral funds as they are cyclical in nature. While sectoral funds can be a small portion of your overall equity asset allocation, the major investment should be in broad, diversified equity mutual funds. Why asset allocation should be the core of every investment portfolio?

Disclaimer: This article is intended for general information purposes only and should not be construed as insurance or investment or tax or legal advice. You should separately obtain independent advice when making decisions in these areas.

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