Invest Smart: Everything you need to know about sectoral funds before investing

Sectoral/thematic funds have been gaining popularity among investors of late. Over the past five months, this category has attracted Rs 14,000 crore. There has been a regular inflow since June.

In this episode of Invest Smart, Vishal Dhawan, Founder and CEO of Plan Ahead Wealth Advisors sheds light on the risk factors, and everything you should know about these funds before investing in them.

Thematic Funds

Dhawan says that whenever the stock markets do well, thematic funds tend to become popular and hence the investors should be well aware of why they are buying a particular theme or sector. Investors should be aware of their own skills and risk tolerance while making the investment decision.

Pros and Cons of thematic funds

The biggest advantage of investment in thematic funds, according to Dhawan, is that it will give a better return compared to an investment made in a stock from the same sector.

Dhawan who emphasised on getting the entry and exit to the fund right said that the worst outcome could be when an investor enters the fund during its peak and exit at its bottom.

Things to know before investing

The foremost thing to take care of is the selection of the fund. Dhawan goes on to say that one must be aware of the pricing in the sector - if it is in a premium rate or in a discounted rate. He advises that the funds should be bought when they are out of favour while projecting green shoots.

Dhawan also says that many do not pay attention to getting the portfolio weight right and tend to overload it with stocks from one particular theme

"Risk Management strategy is very important to get the (portfolio) weightage right. I think not enough people pay attention to this when they are constructing or deciding how to weight a portfolio", says Vishal Dhawan

Who should not invest in sectoral funds

An investor should be able to figure how much exposure the portfolio already has to the sector he/she wants to invest. As per Dhawan, any investor who could make the portfolio weight disproportionate by investing in a sector should avoid sectoral funds. He adds that this investment is only for well informed investors with high risk tolerance.