Tempted to invest in Sectoral / Thematic Funds?

Should I Invest in Sectoral / Thematic Funds? 

Simple Answer - “AVOID”

Detailed Answer:

Sectoral funds invest only in stocks belonging to a particular sector, say Housing, Infrastructure, Defense, Pharma, etc. or themes like rural consumption. While they may give huge returns, they also tend to be riskier due to the below reasons:

·       Impossible to time the entry / exit - Returns from a sector would be cyclical in nature. No one can time the entry at the correct inflection point from Worst to Good & time the exit again at the correct inflection point from Best to Bad. The sector may remain dull due to many factors for many years too.

·       We tend to buy at higher prices: Typically, a sector fund will gain our attention only after the sector had already given huge return in the last 1 year or so. Since many investors will now chase the sector, the fund houses too will launch NFOs (New Fund Offers) related to the sector. We will hear more about them in the news & we will jump to invest at high prices, whereas the opposite is what we should have done.

·       Concentration Risk – High Probability of losses: Since the investment space is restricted to a particular sector, the returns will be based on the performance of that sector only. The risk is not mitigated as with a diversified mutual fund, which invests in various sectors & the fund manager takes care of the % exposure.

·       You probably already have exposure to the sector: We saw how a diversified MF invests in various sectors. Hence, you would already be exposed to that sector – you just didn’t know that!

·       No meaningful return on the upside:  As such, we will not be investing huge money into one specific fund / sector when compared to the over-all portfolio amount. So, there will be no meaningful increase in return, just because of the small exposure to this sectoral fund. But the damage it may do to the portfolio return, in case of fall / negative returns will be higher.

Conclusion:
Better to avoid sectoral funds as they have a narrow investment space & hence riskier. If you still insist, make sure you invest the surplus amount that you are alright to lose / willing to wait for at least 7+ years, just in case. Beware – DO NOT INVEST BY SEEING THE RECENT HIGH RETURNS - you may be in or a surprise (shock)!