Recently one of the Quora Question, that I faced, was related to investment advise towards Sector and thematic fund focusing on Infrastructure as theme. The simple answer could have been “Yes” or “No”, though I thought it is a common knowledge gap people have about such funds and might result in wrong decision at their front. Sharing my view on such funds for your benefit.
What are Sector & Thematic funds?
Mutual funds which invest in stocks of similar industry or sector or theme are called Sector or thematic funds. For example: Infrastructure funds invest in companies like cement manufactures, EPC contractors etc. Banking Sector funds will buy stocks like ICICI Bank, HDFC Bank or State Bank of India etc.
Risk Profiles of these funds?
Since these funds invest in stocks connected with same theme, there is little diversification benefit you get when compare it with Large cap or Multi-cap equity funds. This results in high risk in such funds. These funds return are cyclical in nature, If you buy the thematic fund in a growth cycle you will make more money vs a typical index fund. It can result in reverse as well, hence risk.
Who should invest in such funds?
It is important to time your investments in any specific sector and theme. This means that you should understand the broader market trends and sector specific trends. Since these are cyclical in nature, they are not suitable to core portfolio or long-term investments (>7years). These funds are suitable only for your tactical investments for shorter duration. They should not form >10-12% of your overall portfolio. Best way to invest in such funds are during the start of growth cycle in 3-4 lump-sum investments spread over 1-2 years. This will help in confirming that we are investing in growth cycle and after 3-4 years of your investments you should pull your money out and invest in next cyclical sector.
To summarize, if you are an experienced investor in equity markets with 10+ years of experience. If you have higher risk appetite to withstand the short-term volatility. If you have a bigger portfolio to allocate the 5-10% without compromising your investment objectives. Investing in sector and thematic funds can be good outcome for you, if proper care has been taken. Make sure to review this option with your investment adviser in detail or write to me. Few of the funds in focus at present are from the Pharma Sector and worth reviewing e.g. ICICI Prudential Pharma, Healthcare and Diagnostics Fund, Mirae Asset Healthcare Fund etc.