SECTORAL MUTUAL FUND
Sectoral funds do not find a place in most financial plans as these are considered risky because of their focused exposure. Yet Sectoral funds are also capable of delivering high returns.
As investors in mid-cap and, small-cap equity funds are sitting on handsome gains made over the past few years, sector-focused funds have delivered higher returns over a longer-term.
The primary motivation behind putting resources into a Sectoral fund is to pick up from the concentrated exposure to a pocket of the economy that is doing great and guarantees development in future.
Why Sectoral Fund
When you have a core portfolio in place, it can be a smart thought to take an exposure to the Sectoral fund from a strategic point of view. The extra exposure can give a lift to the overall portfolio returns.
An enhanced equity fund won’t have the capacity to take advantage of the rise in a specific sector regardless of the possibility that it gives some exposure to that sector. Thus, is the requirement for a committed Sectoral support! Other than the banking sector, most expanded equity fund doesn’t have enough portrayal from the other development sector.
A sector’s development can be viably seen just by a devoted fund. Most differentiated equity fund won’t go past a specific point of confinement in taking an important position in a sector. However, a sector fund is not obliged in such manner.
A look at the 10-year performance of mid- and small-cap schemes shows that these have delivered a return of 15% compound annual growth rate, compared with around 18% of funds focused on banking, pharmaceutical and FMCG sectors.
In reality Sectoral funds have provided clinical exposure to the portfolio of all investor. Hence, selecting a right sector would yield higher reward than investing in broader market. In the last 5 years funds focusing on pharmaceutical and FMCG industry have clocked 22.7% and 19.8% compound annual growth rate in spite of their defensive nature.
Risk with a Sectoral Fund
Since this classification of funds is presented to a solitary sector and just a modest bunch of stocks, it conveys a higher hazard compared with diversified equity mutual funds. In a few funds, the best five stocks frequently represent over half of the portfolio. A downturn in maybe a couple of portfolios can hurt the return of the entire fund even if the broader sector fares well. A conventional diversified equity fund, then again, will commonly contribute just 25-30% of the portfolio in its five biggest bet allowing the fund for cushioning. However, unlike a diversified fund, the fund manager of a Sectoral fund does not have the liberty to move away from the sector even if its performance deteriorates.
Investing In a Sectoral Fund
A person investing in a Sectoral Fund must always remember the following highlights:
Choosing the Fund
Fund selection within the chosen sector is, of course, critical. Even though the focus is on one sector, funds within a category come in multiple flavours. Hence selecting wisely is important before investing in a Sectoral Fund
Limiting exposure of the Fund
It is suggestible if you do not have the stomach for the higher degree of volatility of Sectoral funds, stay away from this category. Those willing to take the risk should go only for a limited exposure.
Do not get carried away by past return
Do not invest on the basis of past returns. Too often, investors gravitate towards the flavour of the season and latch on to a sector when the rally is already under way.
All the matters is size
Opt for funds that are relatively large-sized and have a proven track record. If the scheme is too small or a chronic underperformer, chances are the fund house may merge it with another fund from its stables.
It’s a big no to invest using SIP
While investing in traditional equity funds, investors are advised to take the systematic investment plan (SIP) route. SIPs help ride the volatility over a period of time through cost averaging. However, this approach would not serve well if you are hoping to make the most of a sector upswing. When the sector has picked momentum, there is no point averaging your cost as it will dilute your returns.
Always keep your exit door open
Sectoral funds tend to perform differently across market phases and the winners keep rotating. “It is not easy for a regular investor to take a call on the future prospects of a sector and time the entry into a Sectoral scheme and exit at the opportune time.
Sectoral Fund in short are highly volatile, risk oriented, with a ride over a small sector for investment. If lucky, Sectoral fund can yield you with money storm, or just nothing.