Saturday, July 26, 2008

Avoid Sector Funds

Dear all,
It is been a regular pleading from almost all experts in moneycontrol mmb to avoid Sector Funds. We have been requesting you to avoid Sector Funds.

Sector funds require investors who understand the cycles and dynamics. These are not buy and hold kind of funds. Fund managers also have to be very and need to book profits when the sector's valuation is around its peak.

If a Sector hits a Bubble (like the Tech Sector in 2001) then even after 5 years, the stocks in that particular sector will struggle to reach the levels they had reached in Peak. They tend to follow a cycle and if you as an investor want to exit and find the NAV has crashed, you will find that even the Broader market picture is rosy, the Sector Picture may continue to be hazy and struggle to give even average returns.

Sector Funds also tend to have a Very Small Corpus and the Fund Manager will have difficulty in Bearish Times to maintain his AUM and buy stocks to average out.

In fact, to illustrate this point, there is no better example than UTI Mutual Fund. This Fund House launched a Whole set of Sector Funds in Booming Market Conditions. And, now as they are struggling to stem the rot, UTI has announced that they are going to merge UTI Software Fund with Services Industries Fund.

And they are also changing the mandate of Auto Fund by adding the Logistics Sector into the Fund. The Auto Fund AUM is a paltry 31 crores.

If you remember, last year UTI did the same with its Petro Fund by renaming as UTI Energy Fund. But the results continue to be poor.

It just shows that even the AMC people have realised the folly of having Sector Funds and have now resorted to the gimmicks of renaming them and adding additional Sectors.

But inspite of all this, I suggest you, nay request you to AVOID Sector Funds and go for Diversified Equity Funds.

If you are brave and willing to ride out the volatility associated with Sector Funds, then be quick to make a fast exit on the first signs of Downtrend in the Sector.

Of course, there are some sectors which are looking bright for investments now, go ahead and invest in them, but be ready for a volatile ride.
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Best of luck,

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