25 Sep 2020

Can you invest in sectoral funds?

What is a sectoral fund? Sectoral funds invest in equity of companies from a certain industry. For example, Tata Digital India fund invests 93% in the Technology sector; Nippon India Pharma fund invests over 96% in the Healthcare sector. (This is the weightage as on 31 Aug 2020, and can change over time.)

If you ask whether technology companies will continue to make money, the answer is Yes. If you ask whether healthcare companies will continue to make money, the answer is Yes. In fact, the answer would be Yes for most sectors. Does this mean you can invest in any sectoral fund?

The answer, as is often the case, depends on what your investment objectives are. If you are investing for the long-term, say for 10+ years, you are better off investing in funds that will consistently give you returns year after year. That usually means investing in a diversified set of companies across multiple sectors. Index funds are an excellent option; I also like the funds and allocation recommended by Kuvera.

If you know very well about a certain industry and you can reliably predict when an industry will do well, you can buy sectoral funds. But you will have to do active investing where you buy the right funds and the right time and sell them at the right time to hold on to the profits. If you have the skill, time, and interest to do this, sectoral funds are an option. If not, go with diversified funds.

Sectoral funds are, by definition, concentrated portfolios. In investing, concentration means high risk/high reward. You have the potential to make a lot of money, but at the same time you can lose a lot of money too. Understand what this means and decide for yourself if you want to take the risk.

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