How to invest in sector funds

K. ARAVIND

Sector funds are mutual funds that invest only in stocks in certain sectors. Such funds are invested exclusively in technology, banking and pharma. Thematic funds are funds that invest only in a specific theme. Such funds invest in special themes such as consumer goods and healthcare. Thematic funds or sector funds are defined by the Securities and Exchange Board of India (SEBI) as having 80 per cent investment in any particular sector or theme. Since last year, such funds have been required to maintain a strict investment limit.

The advantage of sector funds is that they provide an opportunity to select and invest in areas that perform well in each period. However, investors need to be aware that investing in sector funds carries a higher risk. Circumstances in which trends adversely affect business in a particular sector or new restrictions are imposed by the authorities can lead to loss of investment in a particular sector. At the same time, investing in diversified funds can offset the setbacks in one particular sector through diversification in other sectors. Such diversification is not possible in sector funds or thematic funds.

Investing in sector/thematic funds will only be effective if it is possible to identify exactly which sector is likely to benefit the most during each season. Only investors who can identify the best performing sectors in each season can reap the benefits of investing in these funds. For ordinary investors, it is impossible to predict which sectors will be strong and which will be weakest at each stage of the market. Therefore, there is a high risk of investing a significant amount in sector funds that are mostly portfolio-specific, tempted by short-term gains. Those who are interested in investing in sector funds should do so only on the advice of experts. Profits can only be made if the timing of investing and withdrawing from such funds is accurate. It also requires expert advice. Sector / thematic funds can help a person who is able to identify and invest in areas that go through different cycles in business.

Diversification is the spirit of disciplined investment. Investment diversification is also needed to reduce risk and ensure long-term returns. Investors should always keep this basic principle in mind when investing in equity funds. Investments in equity diversified funds should be made to ensure the security of the portfolio and to reduce the risk of any sector gains in market growth.

Those who want to invest in sector funds should invest only a small portion of the total investment in such funds. For example, 15 per cent of the total equity fund investment can be used for such funds. Care should also be taken to invest this 15 per cent in two or three sectors or themes.