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POSTED BY ON October 3, 2010 8:32 pm COMMENTS (4)
From the time i started reading about Mutual Funds. I have been told not to invest in sector fund. The main reason being all my money in only one sector and any bad news in that will bring down my entire value in it.
I just wanted to dig in existing sector based funds and their performance in long term.See below the top ranked fund by Value Research in each sector and their return from inception
Sector Fund Name Years Return %
I see all of the funds have performed well in a long run. So why should i avoid putting in some part of my investment in one of sector like say ‘banking’. This after 10-15 years is not going to be non existent sector. From the history(which we use for equity diversifed fund) this sould also provided a 12-15% return on a long run. I dont understand why people dont recommend the sector based fund for long term.
Am i Missing something,which is the reason for no recommendation from other people?enlighten me please.
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You need to know one fact that many sectors are inter-linked. e.g., suppose you’ve invested in Banks, Auto, Realty sectors. On first seen, it seems these sectors are not inter-linked & one can go for sectoral funds.
Now, suppose interest rates gets hiked by RBI. So, banks will increase interest rate for home loans, auto loans etc. As a result, demand for new auto loans and home loans will decrease. So, bank income & profit will come down. People will purchase less vehicles from loans and will avoid purchasing new property because of higher EMI.
If an investor has invested in 3 sectoral funds, suddenly, all his portfolio will come down substantially. On the other hand, the fund manager of equity diversified might expose less to these sectors at that time.
If you’re talking about 10-15 years of time, you’ll not be in loss while investing in these sector, but your profit will be less as compared to equity diversified funds.
Hope it will help you.
InvestmentKit
The main reason for high returns is Sudden rise in market from last year. Just do all the calculations till 2008 & you’ll come to know what is the risk in sector funds.
Just avoid them. Your portfolio may move like a tortoise for many years, if stuck in bad news. Always got for Equity diversified mutual funds. They give better return in long-term.
Hope it will help you.
Investmentkit
@moneysavingshelp Ok let it be because of sudden rise in market from last year that caused them to perform higher..your talking about short term… I am saying why these will not perform in long term.Let me say if i have 10-15% of my portfolio in some sector for around 15-20 years..am i going to loose all without compounding?
When we all talk about long term profit for equity diversified ,why not long term in sector based funds?
Is there a trend like if one sector performs the other will go down?
@prabeesh
Performance of the particular sector usually operates in cycle. consider the following
changing sector trend in each bull market: (source: The hindu business line :http://www.blonnet.com/iw/2010/08/29/stories/2010082950150500.htm)
2000 Tech boom:
Bull run : Nov 98 – Feb 2000: Top gainers – Media, Telecom, Software, Realty, consumer durables.
Bear run: Feb 2000-sept 2001: Top losers – Media, software, Telecom, Realty, consumer durables.
2008 infrastructure boom:
Bull run: Jun 2006-Jan 2008: Top gainers – Power, Bank, Realty, Media, Infrastructure.
Bear run: Jan 2008-Mar 2009: Top losers – Media, Infrastructure, steal, textiles, Bank
Recent bull run:
Mar 2009 – Jul 2010: Top gainers – Consumer durables, Fertilizers, Infrastructure, steel, metals.
1. Mostly the sectors which lead the bull run are the one which falls dramatically in the bear phase which will mostly wipes out the gains and the sector usually will take some 4-5 years to regain (for e.g. IT sector funds took almost 3-4 years to regain after 2000 tech bust). So basically to achieve nominal returns of 15% in particular sector you should remain invested in that sector for minimum period of 10-12 years (normally it should include atleast two bull run for that particular sector). On the other hand in equity diversified mutual funds you can atleast avoid this roller-coaster ride.
2. sometimes due to the sectoral mandate, the fund manager forced to invest in few companies of the same sector even though it does not have good growth prospectus.
Nothing wrong in investing sectoral funds unless u know in and out about the particular sector, its future growth prospectus. If you strongly believe in that theme try to limit the exposure to 10-15% in the portfolio.
what do you guys think?