Deciding to invest in a sector may not be challenging but choosing the sector definitely is.

One of the ways to pick a sector is to look at its medium-term prospects. Though sector funds are riskier than diversified funds, invest in a sector which has a good potential in the near term. Hence, the investment tenure too should be a minimum of 2-3 years like diversified funds.

While choosing a sector, avoid investing into a sector which has seen a sharp rise in a short span of time. Though retail investors always tend to chase sectors which are in the news or companies which have seen a sharp upside, such a strategy will only increase the waiting period for investors.

For instance, the flood of IPOs from the construction sector had taken the share prices of many construction and realty sector stocks to dizzying heights, a year ago. Now the sector heads the list of non-performance ones and those who didn’t book profits earlier, have seen huge erosion in value. As a result, investors who made their investment at higher levels will have to wait for a good 3-5 years to see good returns. In fact, one of the big risks associated with a sector is that the performance tends to get cyclical and the investor should have the ability to hold on to his investment.

Besides keeping away from hot sectors, investors would also be better off if they choose sectors which are more dependent on domestic consumers. For instance, sectors like FMCG, retail, services, infrastructure and media are a reflection of the economy though policy changes relating to the sector could have some short-term implications. Infrastructure, for instance, is a typical example which offers good growth potential in the long term.

• Sensex down 1132 to 8640. Nifty (worst fall ever) down 386 to 2557. #

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If there ever was a time when the government needed to overreact to a situation, it is now. The drying up of global liquidity after the bankruptcy of Lehman Brothers has hit financial markets across the board in India with astounding ferocity and speed.

And with that, market uncertainty has spiked to unprecedented levels; rarely have we seen the stock market change direction by 500 points or more in a day, these many number of times, in this short a time. In this environment of hyper-uncertainty, traders, investors and businesses are likely to have overreacted and prices of equity, bonds, foreign exchange have probably overshot their fair valuations.

To increase rupee liquidity cutting CRR to 5 per cent and SLR to 20 per cent, making oil and fertiliser bonds SLR-eligible, increasing the range of repo-eligible assets and even providing insurance against counterparty risk in interbank transactions is the key. To raise dollar liquidity in a predictable manner, setting up a weekly dollar-swap facility against rupee-denominated assets and investing part of the foreign exchange reserves in one-year deposits in foreign branches of Indian banks is the way to go.

Rajiv Mundra has a keen eye for the markets and he has the following post on his Google Group.

Details here Buy & go to sleep for 4-5 years!

Sensex opened with a negative gap of 242 points at 12,284 on the back of negative cues from the global markets. Sensex finally ended with a significant loss of 725 points at 11,802. The market breadth was extremely negative, as advance decline ratio pegged at 0.12

While the financial crisis has felled several international banking giants, closer home, it is the banking sector funds that have outperformed all other categories of funds over the last three months.

Seven of the 10 top performing mutual fund schemes during the July-September quarter were banking schemes, including banking ETFs, says data provided by Value Research. 

The banking sector funds have given an average return of 4.72 per cent for the period, while Gold ETFs have given a 4.26 per cent average return. Equity diversified schemes have recorded negative returns of 5.62 per cent, according to the research firm.

The benchmark index, Sensex, was down by 4.47 per cent, and the S&P CNX Nifty down 2.95 per cent during the July-September quarter.

The banking stocks performed well as they had under-performed badly in the months before the quarter, said Mr Satish Ramanathan, Head of Equities, Sundaram BNP Paribas Mutual Fund.

While the BSE-Bankex was up by 9.51 per cent for the three months ending September 30, it had fallen by more than 23 per cent during the first quarter of the financial year.

While Gold ETFs couldn’t give returns as high as banking funds in the three-month period, they have logged the highest returns of all categories during September, as well as for the six months ended September 30.