I have invested in two sector funds (Pharma and FMCG) and a diversified equity fund. I think sector funds give more returns compared to diversified funds, why is it that investors invest more in diversified funds compared to sector funds?- Krishnan Jayaprakash
Investing in a thematic or sector fund is risky because of the thin investment mandate these funds follow. For instance a pharma fund typically invests in securities of companies belonging to pharma and healthcare sectors or an FMCG sector fund invests in companies that are in the FMCG business. Such ideas are good to explore if you are well-versed with investing and have a diversified mutual fund portfolio that lacks weightage in a specific sector or theme.
Moreover, investing in such funds could be a compelling idea because of economic and policy decisions that favour the sector or theme such that a fund focusing on it can gain from such developments. However, a diversified equity fund has a wide investment mandate and is a better hedge when investing in the stock markets. Make sure you understand the risk with sector funds, and also the fact that exiting these funds is as crucial as entering them and that it may be wise to invest in lump sum in such funds rather than systematically. Sector and thematic allocation should not be high and one should look at not more than 10 per cent allocation to these funds.