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Have you ever planed to invest in Mutual Funds, if you have, then you must have come across funds like Sector Funds, Focused funds, or Theme Funds? These funds invest in one type of asset or in a narrow segment of the market.

Many investors, for there long-term investment choose sector or thematic funds, instead of large-cap equity diversified funds, as they get attracted by the high returns offered by these funds.

Survey says that Gold funds on average delivered around 22% return last year and banking sector funds focused on private sector banks and financial services companies delivered around 18% average return.

Here, the question that struck your investment planning in Sector and Thematic funds is, do these funds high returns is a strong reason to invest? Are these funds consistent with their returns?

Before you decide your investment in the sector or thematic funds, I would like to bring it in your information about the past returns of the sector and thematic funds. Gold funds delivered roughly 3% return in 2017, -8% in 2015 and around -11.5% in 2013. Similarly, Banking sector funds delivered close to 0% returns in 2018 and roughly -8% return in 2015.

You can easily analyze that the sector and thematic funds, do have given a good return last year, but if we talk about consistency in their returns, it is very low.

Sector themed and focused funds invest in a specific type of asset, which makes these funds more vulnerable to sharp declines if things go wrong. Returns may be good, but the risk is high too.

THE GOOD AND THE BAD

Sector funds have the advantage of cyclical return, but to avail that investors should be aware of the right time to enter and exit these funds.

As per the records, gold funds have given negative returns for three out of the last nine calendar years, 10% or lower return for another four, and returns above 20% only in the remaining two years.

For banking sector funds, the past record shows that returns have been negative in four calendar years since 2011, between 10%-15% in two and above 35% in the remaining three calendar years.

Now in case if the investor is unaware of the years with high returns from these funds in advance, then it may land them in shock as the outperforming calendar years are usually followed by negative returns.

Well, if you talk about Diversified Equity Funds, then although they exhibit high volatility, their strategy of investing in a choice of stocks across different sectors, help them maintain the consistency in their performance and return. If we look at historical returns then the large-cap category funds, have given two calendar years of negative return since 2011 of which in one year the category average was -1%, 3 years of sub 10% positive return and 4 years of 10% plus return with the highest category average performance of 36% in 2014.

This is because these funds are diversified in nature, diversification helps in limiting losses resulting from cyclical factors which impact specific sectors.

Well, Sectors funds do give the advantage of high exposure to individual stocks. For example, a banking sector exchange-traded fund has 29% in HDFC Bank and 20% in ICICI Bank, hence, a lot of the return from the fund will depend on what these two stocks do.

WHAT SHOULD ONE DO?

The best answer to this dilemma is, construct a balanced portfolio. In case you have adequate asset allocation or exposure to diversified funds, then you can go adding Sector funds in your portfolio, but before you add a sector fund, decide the amount that you will invest in sector funds and your exit strategy from the fund.

If you want to add gold funds to your portfolio, add them but don’t overload it, add only that much required to create an inflation hedge.

Last but not the least, an ideal portfolio is that, which has every fund in it linked to a specific financial goal, that is your long-term goals. And for your ideal portfolio, high risk and uncertain return themes like sector funds are not useful. Diversified funds are an ideal option to invest for your long-term financial goals, as these funds work on a strategy that has the ability to balance the risk in the long-term.

For any kind of query, you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.

Happy Investing!

(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).