Sector funds, as the name suggests, invest in particular sectors. The basic idea of a sector funds is to enable investor to take advantage of industry cycle .They have the potential to offer attractive return if the timing is right. However ,they do not provide the downside risk protection available in diversified funds.
Thematic fund lock for trends that are likely to result in the out performance of certain sectors or companies. In other words ,they key factors for these funds are those that can make a difference to business profitability and market values. Thematic funds focus on structural as well as a cyclical factor that play an important role in the economy .
Who Should Invest In these Funds?
Sector funds can be an ideal option for investors who understand sector as well as its future potential and seek diversification within that sector. Besides, these funds can play a supporting role in diversified portfolio by allowing investors to increase exposure to sector that may be under represented in their portfolio.
For those who invest in stocks directly , sector fund offer advantages over individual stocks ,as fund manager tracks the industry sector developments for investors .Since the performance of sector funds fluctuates depending in how the respective sectors industries are performing in the market ,a wrong selection of sectors can adversely impact the overall portfolio returns. Therefore it is essential for a sector fund investor to have the ability to withstand short term fluctuations in order to enhance long-term returns.
Key Points
1.Sector funds can be ideal option for investors who understand a sector as well as its future potential ,and seek diversification within those sectors.
2.Sector and thematic funds carry a high degree of risk but also have the potential to provide better returns then diversified funds.
What should be the strategy for investing in these funds be?
Broadly speaking sectors and thematic fund should constitute only a limit portion of an investor’s portfolio .Hence only those investors ‘s Who already have a well –diversified portfolio and who have the risk appetite to absorb extreme volatility should consider investing in these funds .
Individuals can adopt different strategies to reduce the risks generally associated with such funds. One such strategy is to have limited exposure to three –four sectors /themes .It is also advisable to review your portfolio to ensure that you are not investing in a sector them that you already have a sizable exposure to through other funds.
Before investing in these aggressive funds though , you need to access certain key criteria that may be important to your profile. These are:
· How diversified is your portfolio?
· Do you have an appetite for risk and the temperament to track the volatile nature of sectors funds ?
· Do you have the capacity to hold these funds for the longer term ?Can you curb the urge to switch from one sectors /theme to another?
How Much exposure should one have in Sector/thematic funds?
As a thumb rule, for an individual who has decent exposure to equity funds and is conversant ,around 10-15 percent of portfolio can be invested in sector and thematic funds. Remember , who these funds can be riskier than diversified funds, they also have the potential to provide a better returns .The key is to select funds carefully and monitor their progress over the investment period .
What are the risks involved in thematic fund investing?
On the flip side ,there is always the risk that the market may take a longer time to recognize the views of the funds house with to particular them that forms the basic of a fund.
Besides there can be ambiguity in a fund’s definition of a them. For example, some of the infra fund have a low percentage of exposure to the crore infra sector and their portfolios have exposure to more sector then even a well –diversified equity fund. There is also the risk of a fund manager ‘s style becoming t o individualistic ,which may be difficult to follow if the manager decides to leave the fund.
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