Click on the link below to read my article on Sector funds ...
http://epaper.gujaratimidday.com//epaperpdf/gmd/27042015/27042015-md-gm-14.pdf
The English translation of the article is as under:
http://epaper.gujaratimidday.com//epaperpdf/gmd/27042015/27042015-md-gm-14.pdf
The English translation of the article is as under:
“Which sector is
most likely to lead the next bull run? How do I take benefit of the same?”
I wish I knew the
answer. The fact is: while most of us do not know the answer to the above
questions, many want to know. Speculation about the future events, is part of
the basic nature of human beings. We all want to know the future in advance.
Whereas we may not
know the answer to the first question, the second question is easy to answer.
If you know which sector is likely to lead the next bull market, find out if
there mutual funds available investing only in that particular sector. These
funds, as a groupd, are called “Sector Funds”. The objective of these funds is
to generate long-term returns by investing in companies belonging to a
particular sector.
In the Indian
market, we have many options available, viz. Pharma funds, FMCG funds, Banking
and financial services funds, Infotech funds, to name a few.
The investor
having a positive view for a sector may invest in a fund related to that
sector. The critical factors for success is the knowledge of the sector
prospects. In order to understand the sector prospects, you must first
understand how the sector operates. Developing this understanding takes time.
One’s understanding may be limited to one or two or three sectors, at most.
Since these sector
funds invest only in one industry sector, they lose out on the benefit of
diversification. In one of our earlier articles, while talking about
diversification, we had highlighted two issues with concentrated portfolios:
(1) some developments, e.g. changes in Government policy, or technological
advancements, or change in public preferences may have a negative impact on the
prospects of an entire sector; and (2) price movements driven by sentiments may
see fall in the prices of shares belonging to an entire sector together.
In either case,
anyone holding a portfolio concentrated in a sector is likely to see drop in
portfolio value – sometimes for short periods, or sometimes for long. The
prices of shares in a sector are likely to move up or down much more than the
broader market. It is important to understand whether one has the financial and
psychological ability to withdtand such fluctuations – may be deep and long.
Most of us would be better off
leaving the sector selection decision in the hands of the fund manager.
Sometimes what one is trying to
do is to take a view on few sectors based on Government action (or any such
single factor). Your long-term investment strategy should not be changed every
now and then if the Government changes the policies. In the long-term, a
diversified portfolio should actually be able to withstand such changes.
Most of us are better off leaving
the sector selection decision in the hands of the fund manager. You may
consider investing in sector funds only (1) if you understand the secret very
well, and (2) you are ok with the risks, including volatility, of the sector.
Amit Trivedi
The
author runs Karmayog Knowledge Academy. The views expressed are his personal
opinions.
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