Hello Readers!
How are you all? Are you all excited for the new year 2021? Oh! It’s silly to ask, obviously you all must be excited.
The year 2020 was full of tragic moments for the market all over the world. In India, the comeback shown by the stock market in the month of November was recommendable. From the lows of March, the leading market indices have not only regained the lost ground but are also hovering around an all-time-highs.
Not only the stock market, but the mutual fund scheme also started trending on their highs. Mutual fund investors are finding the NAVs (net asset values) of their schemes on a better footing than before. Well, there are many mutual fund investors who have shown their trust in funds related to the pharma and technology sectors.
During the pandemic, the pharma stocks were on focus. The restrictions imposed during the lockdown forced people to work from home that brought the technology sector stocks in the highlight. Not only the stocks but there is a sector fund focused on pharmaceutical and Information Technology that one can choose to invest in. In the last 12 months, returns from schemes have been 55 percent and 44 percent respectively. But at the same time, this fund is too risky for every investor to resist. Before investors plan to invest in these funds, what hit their mind is, do the returns from sectoral funds justify the risk of investing in these funds?
Understand The Risk In Sectoral Funds!
Sectoral mutual funds or sector mutual funds have their investment focused only on the stocks of a specific sector or industry. For instance, an information technology (IT) fund would invest only in IT stocks and an infrastructure fund will invest only in infrastructure stocks. This means that the performance and returns from this fund will depend on the performance of that specific stock or industry.
Well, the sectoral fund is not diversified across industries but, they do offer the benefit of diversification across market-capitalization. That means the portfolio of sectoral funds comprises large, mid, or even small-cap stocks. But do remember as the returns from these funds depend only on a specific sector, thus sector mutual funds are the riskiest funds.
A mutual fund investors who are planning to invest for the long term, it is important to have a core portfolio comprising large-cap schemes with the addition of mid-caps for the kicker in returns. In case if they are planning to add sectoral funds in their portfolio, they need a good analysis, as this fund can reverse the return in quick time.
Apart from Pharma and IT sectors, not all industries are showing strength. In the last 12 months, the sectoral funds like banking, infrastructure mutual fund schemes have given returns in red.
One Should Invest In Sectoral Funds Or Not?
Sectoral funds are risky and there no doubt about that. One must invest in it or not is completely subjected to his/her risk appetite. Go for these only if you have a view on a particular sector and are confident of the sector's future performance. So, before you choose any sector fund to invest track their performance and how often their performance changes, do analyze all.
Once invested, it will also be important to keep a close look at the sector developments and keep reviewing the fund performance on a regular basis.
Last but not the least, the ideal mantra followed while investing in sectoral funds, before you start investing in it, plan your exit strategy from the funds, fix the amount you are going to invest in these funds, and also fix the period of your investment in the sectoral fund.
For any kind of query regarding financial planning 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 of future returns).