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Understand a sector before investing in it



SECTORAL schemes are in the limelight these days. No wonder, considering they have beaten the broad market by a handsome margin lately. Consider this: sectoral funds have outperformed the BSE Sensex by a huge margin. The pharma fund, the top performer, returned 32.26% in the past one year, while the Sensex gained just 11.47%. Other sectoral schemes such as FMCG (31.20%), banking (25.40%) and technology (19.55%) also posted impressive returns in the same period.


   These are exactly the kind of returns that catch the attention of individuals scouting for investing avenues. Blinded by the numbers, many of them consider investing in one of the sectoral schemes. However, this could prove a costly mistake. This is because sectoral schemes tend to move in cycles. For example, the top performers of the season —pharma and FMCG — are classical defensive funds. They always tend to outperform (at least in theory) when there is volatility in the market and confusion about the growth prospects of the economy. That is why it's crucial for the investor to understand the sector thoroughly before entering into it.


   According to financial advisors, it is always imperative to time the entry into sectoral schemes. "They tend to move in cycles. So it is very important that you enter at the right time and get out before they peak," says an expert. "If your timing goes wrong, you would get stuck with a sector with bleak prospects." For example, the banking sector is interest-rate sensitive and higher interest rates are considered negative for the sector. So, if you look at the past performance of the sector and get in without considering a possible rake hike by RBI, you could land yourself in trouble.


   In short, stick to the well-diversified scheme if you are not an expert on sectors. Sure, they may notch up scorching returns once in a while, but you will still be better off in a diversified scheme. This is because your fund manager would take sectoral calls from time to time and you don't have to worry about timing the exit. If you insist on investing in sectoral scheme, invest 10-20% of your corpus in them.

 

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