Mutual Fund Investment: Should you invest in sectoral funds? Find out

By: | Published: August 14, 2017 10:59 AM

Although sectoral funds are considered the riskiest variety of mutual funds, but the lure of extraordinary returns always attracts investors towards them.

Sectoral Funds, mutual funds, risky investment, extraordinary returns, absolute returns, pharmaceuticals, banking & financial services, FMCG, technology, energy, infrastructureSectoral funds pave the way for absolute returns as opposed to relative returns.

If you are an informed investor willing to take higher risks for higher returns, then sectoral funds may be just for you. Although these are considered the riskiest variety of mutual funds, but the lure of extraordinary returns always attracts investors towards them. On must, however, remember the fact that in spite of the growth in mutual fund investments in India, the environment for sectoral funds is still very limited with schemes restricted to pharmaceuticals, banking & financial services, FMCG, technology and other sectors like energy and infrastructure.

“For fund houses and distributors, it is easier to market diversified equity and balanced funds as they have lower risks and are easier to explain. If passive investors buy into sectoral funds, they are exposed to the cyclicalities of those specific industries and the volatility of returns can comparatively be much higher,” says Tejas Khoday, Co-Founder & CEO, FYERS (a stockbroking firm).

Performance

The performance of sectoral funds has been volatile in recent times. All the pharma funds which were once celebrated as outperformers gave a negative return of -12 to -16% in the last one year. In comparison, many of the banking & financial services sector funds have given above 30% and some have given as high as 37%.

“The FMCG funds have a decent return profile of 14 to 15% whereas the technology funds have barely given any return at all as they were lingering at a combined average of around 2.2% in the last one year. Infrastructure funds have seen good returns but the long-term performance of the sector depends on several macro factors which can influence the stock prices in the near future,” says Khoday.

Pros:

# A sectoral fund allows sophisticated investors to take a macro call on a sector.

# It is diversified well within a larger sector which gives it more breadth.

# It does not have to be micromanaged by the investors as the portfolio will be handled by the fund.

# A variety of similar funds allows investors to choose from the better portfolios between funds.

# It allows the investor to choose between different sectors by buying multiple sector funds.

# A higher weight-age is given to a sector which is not possible in regular diversified funds.

# It paves the way for absolute returns as opposed to relative returns.

Cons:

# It has a higher volatility of returns when compared to equity diversified funds.

# If the decision turns out to be wrong, the drawdown can be significant.

# It is meant for knowledgeable investors who want to time the market albeit in the long run.

# There is not enough variety to choose from in India.

# Investors cannot customize the portfolios based on their preferences.

Who should buy

By concept, sectoral funds are meant for educated investors who are willing to take a higher risk to earn higher returns. They should have the ability to analyze the economy as a whole and spot the turn of events which will affect different sectors. They are considered to be the riskiest variety of mutual funds. This explains why some market analysts say that sectoral funds must never be one’s core holdings. However, these funds can be useful tools for investors who want to give a tactical slant to their portfolio and also want to outperform the market.

How to invest in sectoral funds

This decision should be taken based on the nature of cyclicality in the sector. For example, “if you are bullish on the pharmaceutical sector’s revival, then a monthly SIP will be useful because you will be accumulating stocks when the markets are going down and your entry price is likely to be better. If your intention is to ride the wave for a few months or a year, then lump sum investments make the most sense,” informs Khoday.

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