Should you invest in sectoral mutual funds? Find out

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New Delhi | Published: January 9, 2017 6:11:42 AM

Sectoral funds typically focus invest-ments in a single sector, thereby making it critical for the investor to have a view on the sector.

Sectors might encounter different cycles lasting for varying periods, at times extending beyond five years.Sectors might encounter different cycles lasting for varying periods, at times extending beyond five years.

Is it better to invest in a sectoral fund given the volatility in the markets?

—Nilesh Singh

Sectoral funds typically focus invest-ments in a single sector, thereby making it critical for the investor to have a view on the sector. Such funds would tend to be more volatile since performance is determined by the underlying factors driving that sector. Sectors might encounter different cycles lasting for varying periods, at times extending beyond five years. For instance, the S&P BSE Capital Goods index hasn’t regained the peak levels achieved in 2007, due to subdued capital expenditure in the economy, etc. Overall, sectoral funds should be considered only if one has a specific view on the sector and can tole-rate higher volatility. Else it is advisable to stick to diversified equity funds.

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Should I avoid investing small amount of money in multiple funds?

—Rajiv Anand

Mutual funds tend to hold diversified underlying portfolios, typically 40 to 50 stocks in case of equity funds and 30 to 40 securities in case of debt funds. Hence the objective of holding a diversified portfolio of mutual funds should be to avoid concentration at asset class, fund manager and investment strategy levels. For small investments, one can consider investing in hybrid funds like monthly income plans, balanced funds, asset allocation funds, etc., which provide varying exposure to equity, debt and gold, thereby reducing the need to hold multiple funds across asset classes. Thus, for smaller investments, one can hold four to six funds in a portfolio.

The writer is director, Investment Advisory, Morningstar Investment Adviser (India)

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