If you are new to mutual funds, you may want to invest in a range of funds merely to test the waters. While most rookie investors tend to start with index funds, there are others with a higher risk appetite who invest in a slew of funds including thematic or sectoral funds.
This is done to maximise the chances of earning gains because diversification comes at the price of foregone earnings. Too much of diversification can lead to the overlapping of portfolio. On the contrary, sticking to sectoral or thematic funds can help investors earn higher income but expose them to a higher risk at the same time.
Investing in sectoral funds
A sector fund is a mutual fund that invests in one type of industry or sector, for instance, IT finance, industrial, infrastructure, PSU, ESG and FMCG. Some investment advisors opine that investing in sectoral funds leads to a concentrated risk, and is suitable to high risk-taking investors only.
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Sreedharan Sundaram, a SEBI-registered investment advisor and founder of Wealth Ladder Direct says, “Sectoral funds are cyclical in nature, and they should remain a part of satellite portfolio only. One should make some profit and get out of these funds. They have a concentrated risk and are suitable only for high risk-taking investors. It is important to find the right entry and exit points, e.g., auto sector did not perform well between 2018 to 20 but in 2021, these stocks performed well.”
He further says that those looking to invest in sectoral funds can explore some ever-green sectors such as FMCG and pharma, and to some extent – banking.
“If you are looking to invest in a specific sector, one can explore FMCG, pharma and banking sectors. They are defensive, slow but consistent in their performance. Most other sector funds behave in an erratic way,” he adds.
At the same time, some experts do not recommend investing in sector funds beyond a small allocation.
Preeti Zende, a SEBI-registered investment advisor and founder of Apna Dhan Financial Services, says: “Sectoral funds always carry a higher risk because they bet on the performance of a single sector or a theme, unlike diversified equity mutual funds which invest in all types of sectors to mitigate the concentrated risk. So as far as goal-based investments are concerned, I do not recommend investing in sectoral funds as these funds are cyclical that can go through multiple cycles of ups and downs and because of these funds lack consistency over the long term.”
Abhishek Dev, co-founder and CEO of Epsilon Money Mart, says: “It’s difficult to zero in on a particular sector, but investors can invest in flexible equity funds where the fund manager allocates to various sectors and market caps based on relative attractiveness.”