Performance of sector funds
Investors should do shorter-term SIPs, around six months, before deciding to continue
The most common approach while buying a mutual fund scheme is to look at past performance. Financial planners would also add another line: See how the scheme has performed over two cycles — one bull and one bear — to see how it has managed during good and bad times. Unfortunately, the same theory does not apply when investing in sector funds. Many investors would be eyeing some sector funds, such as technology and fast-moving consumer goods (FMCG), because they have withstood the fall in markets better.
Unlike diversified equity funds, which invest in a variety of sectors based on the fund manager's views, sector funds can invest only in one sector and often get caught in bad cycles.
When a sector is witnessing a bull run – technology in the late 90s or infrastructure in 2004-07 – funds based on that sector can give stupendous returns. But, when the bull run ends these funds can languish for several years.
However, remember that sector funds are a high-risk category. And, the fund manager also faces the problem that he cannot exit the stock easily if prospects of the sector are weakening. Their narrow mandate can turn into a handicap at such times.
High valuations are another pointer that it may be time to exit. Investors should also book profits in these funds once they have achieved their target return or after every sharp run-up.
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