Sectoral funds: How to meaningfully benefit from investing in sectors? Here's what experts advise

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FinEdge. “If a particular sector has witnessed a significant upswing, one will need to understand the near to medium term prospects of the sector before considering further allocations," says Girish Lathkar, Partner and Co-founder, Upwisery Private Wealth. A thorough research and understanding the stages of growth of the sector against the backdrop of the overall cycle is important. An investor has the choice to keep investing across cycles or alternatively an investor can consider playing contrarian by moving to sectors which are depressed but have better prospects in the medium term and wait out.

An understanding of the nuances of the sectoral funds spectrum will give us an idea of how they work. Sectoral funds do reflect the underlying potential of the theme as they must invest 80% in the respective sector. This also brings in both the upside potential and downside risk that sectors go through.

Experts advise to limit the exposure to 5% to 10% of the overall diversified equity portfolio; thus first build a diversified portfolio and then follow the sectoral allocation limits. This way even if one has missed any specific sector rally, diversified funds allocation will compensate to some extent as they have allocations spread across sectors. Some sectors like Pharma, Auto and IT are sectors that have long-term growth potential.

“However, the problem arises when investors try to speculate in them by trying to time their entry and exit from these sectors," explains Bhatnagar. Sectoral funds are not meant as short-term bets, but rather for benefiting from the broader paradigm shifts from events like demographic or economic shifts. “One can invest into these sectors through SIPs with a 5-7 year horizon," says Bhatnagar.