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Aggressive Funds - To Hold Or Not To Hold

| 6/6/2011 6:50 PM Monday

By HEMANT RUSTAGICEO
Wiseinvest Advisors Pvt Ltd

Some of the aggressive funds such as sector and thematic funds have emerged to be an important segment of the mutual fund industry. Although these funds have varying degree of suitability to different types of investors, many investors get attracted to them during the Bull Run. However, as the markets turn volatile or bearish, the performance of some of these funds dips and that causes a dilemma in the minds of investors as to whether they should hold them or get rid of them.

Before analysing this issue, let us understand more about these funds and the role they can play in an investor’s port-folio. 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 ideal option for investors who understand a sector as well as its future potential and seek diversification within that sector. Besides, these funds can lend support to a diversified portfolio by allowing investors to increase exposure to those sectors that may be under-rep-resented in the portfolio. Even for those who invest in stocks directly, sector funds offer advantages over individual stocks as the fund manager tracks the industry/sector developments for its investors. Since the performance of sector funds fluctuates depending on how their particular sector/industries are performing in the market, a wrong selection of sector(s) can adversely affect the overall portfolio return. Therefore, for a sector fund investor, it is essential to have the ability to withstand the short-term fluctuations in order to enhance long-term returns.

As regards thematic funds, they 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 out-performance 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 the 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 the views of the fund house with regards to a particular theme which forms the basis of launching a fund.

However, despite being aggressive by nature, one can adopt different strategies to reduce the risks generally associated with sector or thematic funds. For example, one can have a small exposure in multiple industries rather than having a huge exposure in one sector. Today, the mutual fund industry offers a wide variety of sector and thematic funds. It can be useful in taking advantage of the changing market conditions and continually optimising the risk-reward char-acteristics of a diversified portfolio. To employ this approach effectively, one must understand and follow the dynamics of funds considered for investing.

As a thumb rule, for someone who has a decent exposure to equity funds and is conversant with the behaviour of the equity market, around 10-15 per cent of the portfolio can be invested 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 and monitor the progress over the investment period.

So, if you are one of those investors who have these aggressive funds in your portfolio and are wondering what to do with them in the current market conditions, it’s time to have a closer look at your overall portfolio composition. If you are not sure whether you have considered all the factors needed to be considered before investing in these funds, you must do it now to find out whether you should remain invested in them or not.  Remember, holding aggressive funds in the portfolio is not such a bad thing. However, holding them in a large proportion as well as holding those funds that invest in sectors that require frequent changes certainly is.

 

Find More Articles on: DSIJ Magazine, In Focus, Personal Finance, Mutual Funds

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