Moving forward, investment in large cap mutual fund schemes should be the next logical step.
As investing in mutual funds gains traction, the choices for diversification within the investment product is available for investors.
Start with liquid funds
An ideal investment introduction should be through a liquid fund to park temporary funds along with the emergency funds. A look into the hybrid funds, which has asset allocation in both debt and equity could be the next step. Moving forward, investment in large cap mutual fund schemes should be the next logical step. As one gets convinced and comfortable with the product, an investor can diversify further into mid-cap and small-cap schemes.
Sectoral funds
Besides investing in categories as per market capitalisation, an investor can also invest in identified sectors like pharma, infrastructure or banking. Investing in a sector is not for a new entrant. Sectoral investing is for the informed investor, who believes that he understands or has a certain idea of the workings of the sector.
Choosing a sectoral fund is different from choosing a typical large-cap scheme. A sectoral fund has allocations in the specific sector, say, banking. It will have portfolio holdings of banking stocks and if the scheme allows holdings in NBFC stocks, then the same too.
Returns from funds
The returns generated by two distinct schemes within the sector can also be different. Say, one banking sector scheme permits exposure to derivative instruments while another scheme only permits investing in the cash sector. The returns generated by the schemes will vary. This can lead the investor to invest in the scheme generating higher return as compared to his risk appetite. Investing in a scheme, which permits investment in a derivative product, needs to be as per the risk profile. So looking at the portfolio constitutes a very important part while choosing the sectoral funds.
Entry and exit
Besides choosing when to enter, more important is when to exit. Between 2010 to 2014, pharma sector mutual fund schemes generated returns which were in excess of the returns generated by large-cap mutual funds. But with negative news coming in from every corner, this sector has generated negative returns in the last one year and very low single-digit return , over a three-year period, thereby negating returns of the earlier years. Unless you had taken the call to exit, based on your Investment Policy Statement (IPS) you would not have exited the scheme and would have wiped away the returns generated.
Remember the string of NFOs of the infrastructure sector in 2007? All the schemes of this sector hit rock bottom when the downturn of 2008-09 occurred.
Timing in sectoral funds is integral and if the nature is cyclical, as in infrastructure sector, you as an investor better get it right. Only an informed investor should look at sectoral funds as a core allocation. However, as part of asset allocation, the investment in sectoral funds can be a tactical allocation. The returns generated when the sectoral call hits the bull’s eye can be more than the typical funds, but then be aware of the downturns too.
The author is managing partner, BellWether Advisors LLP.
