Should You Invest In Sector & Thematic Funds?

Sector and thematic funds have been attracting a lot of inflows from investors. Although these funds have varying degree of suitability to different segments of investors, those who want to park their funds often get attracted to them when the going is good in the stock market. However, as the markets turn volatile or bearish, the performance of some of these funds gets more impacted than diversified funds. This often causes a dilemma in the minds of investors as to whether they should hold them or get rid of them. 

In the present scenario, although the markets have been underperforming for the last six months, investors continue to invest in these funds in the hope of a turnaround soon. Before analysing whether you should invest in sector and or thematic funds, let us understand more about these funds and their role in your portfolio. While sector fund investing can be described as an intermediate between investing in an individual stock in a sector and in a diversified equity portfolio, thematic investing is about taking exposure in companies that fit a theme but can include multiple sectors. 

A sector fund can be an option for you if you understand a sector as well as its future potential and seek diversification within that sector. Besides, these funds can support a diversified portfolio by allowing you to increase exposure to sectors that may be under-represented in your portfolio. Even if you invest in stocks directly, sector funds offer advantages over individual stocks as the fund manager tracks the industry or sector development for its investors. 

Since the performance of sector funds fluctuates depending on how their particular sector or industries are performing in the market, a wrong selection of sector(s) can adversely affect the overall portfolio return. Therefore, if you are an investor in sector funds or are looking to invest in these funds, you must be able to time the entry and exit and withstand the short-term fluctuations to enhance long-term returns. Most common investors struggle to do this and, hence, must avoid investing in them. 

A sector fund can be an option if you understand a sector's future potential. These funds can support a diversified portfolio by allowing you to increase exposure to industries that may be underrepresented in your portfolio. 

Thematic funds focus on structural as well as cyclical factors that play an important role in the economy. A thematic fund looks for trends that are likely to result in the outperformance of certain sectors or companies. In other words, the key factors are those that can make a difference to business profitability and market values. By incorporating a macro environment in the investment process, a thematic fund adds value and protects investments from adverse movements in the macro environment. 

On the flip side, there is always a risk that the market may take more time to recognise views of the fund house regarding a particular theme which forms the basis of launching a fund. As a thumb rule, invest in these aggressive funds only if you are an experienced investor and are conversant with the behaviour of the equity market. You can consider investing around 10 per cent of the portfolio in sector and thematic funds. Remember, while these funds, by nature, can be riskier than diversified funds, they have the potential to provide better returns. 

The key is to select the funds carefully, time the entry and exit right and ensure that the sector or theme is under-represented in your existing portfolio. Remember, holding aggressive funds in your portfolio is not bad. However, keeping them in a large proportion as well as holding those funds that invest in sectors or themes that require frequent changes certainly is. A wise investor considers all the options laid before him and then chooses the ones that will help in the investment mission, whether to create wealth over the long term or make a profit in the short term.