Should you invest in sector, thematic mutual funds
Posted by: Arti Bhargava on May 22, 2017, 11.52 AM IST
Alka is new to mutual fund investing. She is in her late 30s and wants to build a mutual fund portfolio for the long term. She has done her own research and shortlisted a few equity funds by ranking them on the basis of three-year and five-year returns.
There is a large-cap fund, a banking sector fund, infrastructure fund, mid-cap fund and a multi-cap diversified fund. Her idea is to maximise returns by investing in these funds.
However, her colleagues tell her that it is not that simple. Alka isn't sure why she needs to opt for anything else if she has already shortlisted the top four funds on a historical basis.
Alka must first understand the types of funds that she has shortlisted. With large-cap and diversified funds, she will be allowing her fund manager to look out for good quality stocks across sectors and segments. But with banking and infrastructure funds, she will be limiting her investment to certain sectors or themes.
While these funds would perform well when the sector or theme is performing, they could leave her stuck if the latter fizzles out. Alka must ask herself if she's qualified to make these decisions. When she opts for a sectoral or thematic fund, she is essentially playing the role of a fund manager in terms of deciding the theme or sector that will work for her investments.
To succeed at sectoral investing, she must ensure she completely understands the sector that she is planning to invest in. She also needs to get the timing of investment right. If Alka enters the sectoral fund when the sector has already delivered, she is likely to be left high and dry. Moreover, since investment opportunities may be limited to a small sector or theme, there may be fewer stocks in the portfolio and each holding is likely to be higher. This too makes it a high-risk bet, as the portfolio may not be optimally diversified.
Alka has to decide if she is ready to be able to take such calls. If not, stock selection is best left to the experts and fund managers. That's the whole point of investing through a mutual fund. She might want to consider a sectoral or thematic fund only for a limited horizon, in addition to her core long-term portfolio of diversified funds, so that she can time her entry and exit correctly.