In other sectors such as engineering, auto, commodities and pharmaceutical, the frontline players such as ABB, BHEL, TVS Motor, Tata Engineering, Tata Steel, ONGC, Dr Reddy's Labs and Ranbaxy have led the rally.

Few fund options

The second way to ride the themes would be to go for equity funds that have a good track record. Usually, one or at most two funds get into a theme early and also get out at the right time. The rest tend to be followers, at different stages. They may provide at best modest returns, if not a splash of red on the report card.

A few schemes which have shown the ability to consistently time their entry and exit right have been Zurich India Equity, Zurich India Tax Saver, Prima and Bluechip, and, to a lesser extent, Alliance Tax Relief. But even with mutual funds, investors need to exit when the theme has delivered the target returns.

Trend in themes

FMCG, pharmaceuticals, IT, oil and gas (driven by disinvestment and decontrol), auto, engineering and banking. This is the order in which sector preferences of investors have moved in the last five years. The preferences have changed frequently. Over a three-year period, no sector has found favour for more than two quarters running. When a theme is running, the uptrend in prices is sizeable, ranging from 20 per cent to 70 per cent. But these gains also come in a very short period — usually less than three months.

What this means for investors is they have to be extremely alert if they are to capitalise on any running theme. Even if one enters a theme one quarter late, the scope for gains may be very limited. There may even be sizeable downside risks.

Interestingly, over the time frame under study, the only two sectors that have provided meaningful returns are pharmaceutical and PSU stocks. The latter was largely because of the strong showing of oil sector stocks in early 2002 and banking stocks in the last six months. The idea of disinvestment through strategic sale is also a factor, though it comes into play upon the manner the policy is pursued by the government at various points in time.

`Buy-and-hold' bruises

A buy-and-hold strategy will also not pay. Investors must not miss out on the periods a sector enjoys market fancy to book profits. For instance, this may be a good time to look at stocks in the finance sector such as SBI, Canara Bank and Punjab National Bank and book profits.

Locking up funds in one or two sectors may lead to erosion of capital. For instance, assume one has been holding FMCG and pharma stocks between 1999 and 2003; traditionally seen as defensive stocks with modest downside risk over a longer time frame. But even had one had the best possible portfolio in these two sectors between 1999 and 2003, one would have still been left with losses. This is the case with two sectors where one can visualise growth rates with a considerable degree of certainty. So the problems with riding other sector themes can be imagined as more volatile factors affect revenue and earnings. The problems that funds have had with even the likes of Infosys and Wipro (leave alone other IT stocks) are well known.

Pointers from price trends

A study of the sector-wise quarterly stock price returns between 1999 and 2003 provides the following key pointers:

The fall of Hindustan Lever from fancy tells the tale. No FMCG stock outperformed the market during this period. That engineering and auto sector stocks continue to be in the red for this period is because of the sharp decline they suffered in 2000-01. The rally spread over a couple of quarters in the last one year was not enough to wash away the thick coat of red painted then.

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