Investing in a particular sector or stock isn't an easy call. Sample this: The infrastructure sector, once a darling of the market pundits, has taken a severe beating in the past few years. So, while the benchmark indices – Sensex, Nifty and mid-cap – have given returns of over 20 per cent in 2012, infrastructure funds have returned only 15 per cent. And over a three-year period, infrastructure funds are the second-worst performer at annual returns of minus four per cent.
On the other hand, moves like hike in petrol prices in the last few months, along with allowing foreign direct investment in retail and deferment of General Anti-Avoidance Rule (GAAR) have improved the overall investment mood, thereby driving the Sensex to near-20,000 levels. If the Reserve Bank of India (RBI) does cut rates, things would improve further for some sectors.
But can you bet on any sector or stock, based on these events? The answer can be both yes and no. It depends on two factors: Your risk appetite and the percentage of portfolio that is being invested in such stocks/sectors. Even if you have the risk appetite, it is important to contain your investment to any particular sector to 10-15 per cent.
The signals, at a broad level, for a sector or stock to be re-rated are action expected in the sector -- it could be a cut in rates or government action. So, often there can be pre-emptive action from traders in these scrips. For instance, sectors like banking, which are rate sensitive, were under stress the whole year. But banking funds moved up almost 41 per cent belying the pressure of their books.
Even amid bank stocks, there were particular picks. The shares of public sector banks did not do so well. That is, while the country's largest bank State Bank of India's shares rose 33 per cent, Bank of Baroda rose 19 per cent even as Punjab National Bank fell 0.29 per cent. These stocks were badly hit because of the high interest rates, which affected the repayment capacity of companies and in turn resulted in high non-performing assets for banks.
But private banks did not face the same fate, as investors felt they had handled their bad loans better. So, HDFC Bank, ICICI Bank and Axis Bank all rose by almost 40-50 per cent. "That is why even though private banks were in a challenged sector, they were not too badly hit," says Vinay Khattar, head - research (individual clients) at Edelweiss Financial Services.
At a micro level, it could be factors like a company paying off its debt, a court ruling in favour of a company, an acquisition done at a cheap valuation or the sale of a division that is not doing well. Like, it happened in the case of Diageo-United Spirits when the share price moved up sharply both before and after the deal was announced.
Most experts feel stocks could do well this year. "Going ahead, at an index level the returns will be decent. We may see stock specific outperformance," says Jagannadham Thunuguntla, equity – head at SMC Capital. But it will be necessary to take the right call. If you are unsure, stick to index and large-cap funds.