iStockPhoto
iStockPhoto

This or that: Sector funds or diversified funds

If you are a first-time mutual fund investor and want to invest in equity mutual funds, which one should you choose?

If you are a first-time mutual fund investor and want to invest in equity mutual funds, which one should you choose—a diversified equity fund or a focused sector fund? Although you might want to hold some of both, yet it helps to familiarise yourself with details before deciding which to choose. Mint explains some features that can help you decide.

INVESTMENT SCOPE
Diversified equity funds invest in stocks picked from various sectors. Some are focused in a specific market capitalisation domain like large-cap, mid- cap and small-cap funds, or there could be more dispersed multi-cap funds. Sector funds have stocks belonging to a particular sector. They have fewer stocks in a specific sector.

Diversified fund: good

Sector fund : bad

FOCUSED EXPOSURE
Sector funds give you a targeted exposure to stocks in one segment of the economy. Also, individual stocks hold a bigger weight in the fund basket. Diversified funds are spread across stocks in at least 12-15 sectors and have to limit single stock exposure to 10% of the fund’s asset under management (AUM), giving a varied exposure.

Diversified fund: good

Sector fund: bad

VOLATILITY
Frequent sharp changes in daily net asset value (NAV) may not work well if you are just starting out. Concentrated exposures can result in higher impact on scheme NAV. If there is a sudden change in the stock price, daily NAV will react accordingly. In diversified funds as exposures to single stocks are spread out, NAV volatility is relatively lower.

Diversified fund: good

Sector fund: bad

CHOICE OF FUND
When you start out, you should be able to choose from many schemes. Sector funds aren’t launched by all fund houses and some sectors have a wider coverage than others. For example, there are around 18 banking sector funds but only two dedicated FMCG sector funds. There are 150 large cap diversified funds and 155 multi-cap funds.

Diversified fund: good

Sector fund: bad

Close