Can sector rotation drive better returns? ICICI Prudential has a strategy

India’s equity market has repeatedly demonstrated that sector leadership does not remain constant for long. Sectors that outperform during one phase of the market cycle can quickly lose momentum, while previously overlooked segments suddenly emerge as leaders. For investors, identifying these shifts early and acting on them without being influenced by market noise or emotions can be one of the toughest challenges in investing.

This is precisely where sector rotation strategies are increasingly finding relevance. Rather than asking investors to decide when to enter or exit specific sectors, fund managers are attempting to institutionalise the process using data, valuations and macroeconomic indicators. ICICI Prudential believes its Multi Sector Passive FoF offers one such structured approach.

Case for sector rotation

Sector performance in India has historically moved through different phases of economic cycles. During recovery periods, cyclical sectors such as banking, metals or power often lead market gains. During uncertain periods, investors frequently gravitate toward defensive sectors like FMCG and pharmaceuticals.

The challenge, however, is that investors often react to past performance rather than future opportunities. By the time a sector becomes popular, a significant portion of gains may already have occurred.

ICICI Prudential argues that retail investors face multiple hurdles while taking sector calls — understanding correlations between macroeconomic trends and sector performance, controlling emotions during market extremes, and identifying the right sectors at the right time.

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Market cycles

The ICICI Prudential Multi Sector Passive FoF follows a model-based approach that invests across passive domestic sector and multi-sector ETFs rather than directly selecting stocks.

The strategy seeks to participate in sector opportunities while reducing emotional decision-making. Its investment process involves monitoring macroeconomic trends, identifying sectors likely to benefit, selecting relevant ETFs and then assigning portfolio weights accordingly.

The idea is not to predict short-term market moves but to adjust exposure based on changing risk-reward opportunities.

Portfolio changes

Recent allocation changes provide a glimpse into how the strategy works in practice.

Private banks have emerged as one of the fund’s largest allocations after valuation corrections created what the fund house viewed as attractive opportunities. Exposure to ICICI Prudential Nifty Private Bank ETF increased from around 19% to 26%.

Power exposure also increased as demand expectations improved. Meanwhile, the strategy reduced exposure to metals after a strong sector rally and profit-booking opportunities.

As of March 2026, private banks represented the largest exposure in the portfolio, followed by FMCG, IT, Oil & Gas, Auto, Metal and Power sectors.

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Beyond sector selection

Apart from dynamic allocation, the structure also aims to simplify execution.

Investors avoid the operational burden of buying and managing multiple ETFs individually. Internal portfolio reallocations within the fund do not trigger capital gains taxation at the investor level, unlike direct switching between ETFs. ICICI Prudential refers to this framework as its “SMART” approach focused on selection, movement, assignment, timing and taxation efficiency.

The scheme is managed by Sankaran Naren and Dharmesh Kakkad, among others, and is benchmarked against the Nifty 500 TRI.

Performance data as of March 2026 shows the fund has delivered a since-inception CAGR of 12.92%, slightly ahead of the benchmark’s 12.45%.

For investors who believe market leadership may continue rotating across sectors rather than remaining concentrated in a handful of themes, ICICI Prudential’s strategy attempts to offer a disciplined way to participate without constantly trying to predict the next winner.

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