Sector Mutual Funds: Who should invest and why – Portfolio exposure and risk assessment
Mutual Funds have become one of the most popular investment avenues in recent times. The numbers of investors are increasing steadily. This is because of the high returns investors get by parking their funds in equity. However, mutual funds are not all about equity related instruments. There are multiple funds that invest in different asset classes like equity, debt, real estate, gold, etc. Mutual funds provide ways to diversify investment portfolios. The diversification is advised because it opens windows of investments and thus gives a higher return than any other traditional form of investment. Besides, this minimises the risk investors face while participating in equity.
Investing directly in the share market is risky, but also delivers handsome rewards. People fear losing their money by investing directly in the share market because they lack expertise. But mutual funds have made investing money in the share market easy and also minimised the risk. In return, the funds deliver returns well above the other investment tools, especially when an investor stays invested for a long time.
Experts give a thrust on diversifying the portfolio by making investments in different sectors of the economy. There are various mutual funds which allow investors to invest in specific sectors of the economy. These kinds of funds are called Sector Mutual Funds. Sector funds are equity schemes where Asset Management Companies (AMCs) invest in a specific sector. These sectors can be utilities, energy, infrastructure, technology, banking, resources, communications, healthcare and more.
Sectoral mutual funds allow investors to participate in best-performing stocks in the specified sector. AMCs have experts who command an experience in managing these funds.
According to Harish Krishnan, EVP & Fund Manager Equity, Kotak Mahindra Asset Management, sectoral funds have a pre-defined universe which typically cover a key sector or a couple of sectors. Within this pre-defined universe, the fund manager chooses businesses based on their assessment of risk-reward and longer-term attractiveness of these businesses.
Harish said that if an investor’s portfolio lacks exposure in a specific sector, then the sector funds can be an option to invest in the sector in a diversified manner.
“Generally, these are best suited to investors who already own diversified funds in their core allocations, and want an opportunistic investment in the sector. These also appeal to institutional investors/family offices who want focused exposure to a particular sector, and would rather own a basket of companies in the sector rather than identifying individual businesses within the sector,” Harish said.
Sector Mutual Funds: Risk Factor
As per SEBI regulations, sector funds have to invest at least 80 per cent of their assets in their mandated sector. Hence, their fund managers cannot exit the mandated sectors even if they are convinced of its prolonged underperformance due to business cycles, government regulations or other factors.
“Since a sectoral fund is launched for a specific sector, the risk increases because of concentrated investments. These investments make sense when a certain sector is deemed to be on the growth path for the next few years. Only those investors who have already built diversified portfolios and are willing to take the volatility of sector funds should invest in such funds,” Karan Datta, former chief business officer, Axis Mutual Fund, said.
Sector Mutual Funds: Redemption Timing Important
Sahil Arora, senior director, Paisabazaar.com, said that sector funds can provide cashing in on an opportunity and therefore, the exit timing is crucial. He said that returns generated by sector funds primarily depend on the performance of the respective sector, which these funds are mandated to invest in.
“This leads to higher risk for sector funds compared to the sector agnostic diversified equity funds,” Sahil said.
He suggested that investors should opt for sector funds only if they can closely track the trends of the mandated sector and time their investments and redemptions accordingly.
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