In addition to sectors below, Auto sector is another one where I want to invest but don't understand very well. I only understand that India still has a large scope for improved automobiles, and will grow further, but yes, there're concerns of mileage sensitivity and high interest rates impacting new vehicle sales. Yes, I believe a good fund manager can choose the right automotive stocks and benefit from this long term growth prospect.
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This is an old debate in my mind; you believe in long term prospects of a sector / industry, but since you don't understand the business well enough (specifics which go behind the scenes), you're not comfortable analyzing individual businesses in these sectors. In my case, these are:
1. Banking & Financial Services
2. Oil and Natural Gas
3. Energy & Power (conventional and alternate sources)
For each of these, I've a 'macro' viewpoint why these sectors will perform well in the long run, here're they:
1. Oil and Natural Gas is mainly burdened due to under-recoveries arising out of subsidies, and as I wrote last year, there're very strong reasons to gradually reduce fuel subsidy and make these products 'free tradable'. There're already strong signs of that happening, and as things improve, it'll very positively impact businesses in this industry.
2. As inflation lowers, interest rates reduce and infrastructure spending resumes, the first sectors to benefit would be power and energy - India cannot grow without improving the infrastructure to deliver good quality power to the industries, and there's a huge scope of improvement in these sectors. A lot of capital goods investment will be needed to make the power generation & transmission more efficient (and hence my strong belief in BHEL and Crompton Greaves), and this will benefit all the businesses that're involved in power generation, transmission or distribution. In addition to conventional sources of energy, a lot of focus is needed to improve the competitiveness of alternate sources of energy, failing which, India cannot bridge the "power deficit".
3. If the above two hold true, and infra spending comes back to good levels, a lot of problems related to NPAs and asset quality for PSU banks will be reduced, as these businesses will have cash flow to pay back interest and principal to banks. More new loans will be taken and this will further improve "topline" of banks.
Now, the problem part - why is it difficult to analyze these businesses?
a. Banks, especially PSU banks have a high influence from government, and this "ensures" that the asset quality of banks can deteriorate without any prior notice, banks may need to make "bad capital allocation" decisions under this influence. A large part of this also holds true for PSU companies in Oil, Natural Gas and Energy sector, and this brings the "factor of high uncertainty" and skews the risk-reward ratio to an unfavorable degree for individual investments.
b. Private players (most of them) in the sector have "bad reputation" of being un-ethical managers, or they're known to be involved closely with Indian politics and this again brings another high uncertainly factor.
c. There's a huge polarization within banking sector - private sector banks are quite expensive while PSU banks are cheap, and it's difficult to chose which ones to pick for individual investment.
Overall, there're compelling reasons to invest in these sectors, but the risk of individual stock picking is high and potential rewards don't justify taking so much risk. Additionally, most of these shares have "high market" price and hence a "basket investing' in selected stocks is also not easy for a small investor like me.
Why not choose passive index funds? Well, I'm not aware of any index funds for Oil and Gas sector or Energy sector, and the banking index funds have expense ratio nearly same as mutual funds mentioned below (HDFC Top 200 Direct Plan has an expense ratio of less than 1.75%, only marginally more than the cheapest banking ETF, and it's not too expensive for an actively managed fund which can 'avoid' investing in questionable stocks, which may still be part of passive index funds)
Hence, I'm planning to invest in a mutual fund that holds significantly in these sectors. I started analyzing the large cap (most of the good businesses in these sectors are too large to be small / mid cap stocks) funds I like, and incidentally, HDFC Top 200 holds more than 57% of it's holdings in these 4 sectors (capital goods included), as can be seen from blow table:
I understand that many of these stocks have become expensive, but since I have a decent belief in this theory, as well as asset allocation capabilities of fund managers of these funds, I'll go ahead with a prudent, incremental investment in these funds. I already have small investment in HDFC Top 200 Fund, and I now plan to increase investment in these two funds. I'll start SIP in Franklin Bluechip fund, and will make incremental top-ups to HDFC Top 200 Fund (easy as I can do a switch from HDFC Cash management fund just with an online click)
I welcome criticism on this plan - and will wait for the "idea soak in period" before acting :-), especially to let the 'dis-appointing feeling of missing the train (I got this thought first when NIFTY was at 5000 in Jan 2012, and I'm revisiting this when NIFTY is flirting with it's all time high levels)
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