Monday, April 27, 2015

Who should consider investing in sector funds?

Click on the link below to read my article on Sector funds ...

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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