Should You Have Sector Funds In Your Portfolio?

Should You Have Sector Funds In Your Portfolio?

by Nutan Gupta Last Updated: Feb 08, 2017 - 04:30 am 220.1k Views

Sector funds do not find a place in most financial plans as these are considered risky because of their focused exposure. For wealth creation, advisors typically prescribe a mix of diversified equity funds. Equity Funds are considered safer since the money is diversified across companies from various sectors to limit the risk arising from a downturn in some industries.However, it has been seen that sector funds are also capable of delivering high returns. Hence the question arises, ‘Are the investors losing out by staying completely clear of this category of funds?’ Here is a list of a few ways in which you can make the most of Sector Funds:

How Should You Invest In Sector Funds?

Take Limited Exposure
Sector funds should never form a part of your core portfolio. These funds should only be used to complement your existing portfolio. If you are willing to take the risk, you should go only for a limited exposure. Most experts suggest that these funds should not make up more than 10-15% of an investor's portfolio. It is better to go with only one or two sector funds.

2) Fund Selection is Key
Fund selection within the chosen sector is, of course, critical. Even though the focus is on one segment, funds within a category come in multiple types. For instance, some banking funds are tilted towards private sector banking stocks and NBFCs, which have better asset quality and higher profitability.

3) Don't Look at Past Returns
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. That is not to say that you should invest in a sector that is out of favour. Invest only if you are convinced of improvement in that sector's prospects.

4) Size Matters
Opt for funds that are relatively large-sized and have a proven track record. If the scheme is too small or a chronic under-performer, chances are the fund house may merge it with another fund from its sector.

5) Don't invest via SIPs
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. 

6) Have an Exit Strategy 
Sector funds tend to perform differently across market phases and the winners keep rotating. You should invest in such funds only till the time the sector's fundamentals are on a strong 

Most experts suggest that you could go your entire life without ever owning a sector fund and probably never miss it. The point simply means that a well-diversified portfolio doesn't need sector funds. However, if done right, the sector fund can also give you better returns than investing in small and mid-cap equity funds.

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