FINANCE/ MF SPECIAL ....Who should invest in sector funds?

Who should invest in sector funds?

Only investors with sectoral understanding, high risk appetite and the ability to time the market should consider this segment.

Technology funds have delivered fabulous returns: The category average for the past year stands at 43.75%. Strong performance has led to investor interest in these funds once again. Should you get into them? Experts advise caution. Do not get lured by a particular sector’s historical return. The consumer goods sector did well in 2017, but in 2018, it was the technology sector. So, you need to be careful when choosing a sector fund. The following points will help you decide better.

Only for evolved investors: Sector funds are not for mutual fund investors who want to ‘buy and forget’. Identifying the right sector requires considerable effort. “The due diligence needed for sector fund is much higher compared to diversified equity funds,” says Ankur Maheshwari, CEO, Equirus Wealth Management. You also need to have knowledge about the various sector. “Only people with deep understanding about the sector (doctors in case of healthcare industry, IT professionals in case of technology sector, etc.) should invest in sector funds. Others can ignore this category,” says Ankur Kapur, Advisory Head, Banyan Capital.

Requires timing

The general rule about mutual fund investing is that you should not try to time the market however, in case of sector funds, timing is important. “Since each sector will have its own cycle, only investors who can time the sector cycle should only consider this segment. If you are bullish on a sector and understand its cycle, then go for funds dedicated to that sector,” says Kunal Bajaj, Founder and CEO, Clearfunds. In other words, besides the knowledge about the sector, investors should also have an understanding of the market sentiments towards a sector.

Just like entry, timing the exit, based on valuations is critical. This is because sector prospects and outlook usually look bright during market peaks. “Exit is critical here. Infrastructure sector funds generated fabulous returns in 2007, but they got erased in later years,” says Maheshwari. While the holdingperiod can be medium to long for secular themes like infrastructure, consumption, etc, it needs to be short to medium for cyclical sectors such as commodities.

For high risk takers

Within equity funds, sector funds are the riskiest, so only investors who can withstand high volatility should get into this segment. One way to reduce risk is to bet on sectors that are expected to do well in the next 3-4 years. Risk also varies for different sectors. For instance, the risk in free cash flow generating sectors such IT, pharma, consumption, etc., will be less compared to sectors with high cash burn, such as infrastructure.

You also need to follow proper risk-management techniques. Please note: high risk-taking doesn’t mean reckless investing and, even if you decide to invest in sector funds, it should not form the core of your portfolio. “Since the risk level is high, any allocation to sector funds should be tactical and, ideally, should not exceed 15%-20% of your portfolio,” says Maheshwari.

by Narendra Nathan

ETW24AUG18