Should You Have Sector Funds In Your Portfolio?

Nutan Gupta

02 Aug 2017

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?

1)
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 

Conclusion
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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Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 


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Should You Have Sector Funds In Your Portfolio?

Nutan Gupta

02 Aug 2017

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?

1)
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 

Conclusion
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.

Have Referral Code?