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Perils of Specialty Funds

Thematic & sector funds are risky prospects for new investors, only seasoned ones should opt for them…

I have 5 SIP's of Rs 1,000 each in Reliance Growth, UTI Opportunities, UTI Banking Sector, DSPBR T. I. G. E. R, UTI RBP. I am a long term investor. How is my portfolio looking should I change any of the schemes?
- Sachin Joshi



Schemes  Category  Rating  3-yrs ret (%)  5-yrs ret (%)
Reliance Growth Mid & Small Cap *** 9.29 14.9
UTI Opportunities Large & Mid Cap ***** 14.13 12.58
UTI Banking Sector Banking Not Rated 20.59 22.72
DSPBR T.I.G.E.R Infrastructure **** 1.27 10.54
UTI RBP Hybrid: Debt-oriented Aggressive *** 8.69 7.98
Returns as on March 28, 2011 Ratings as on February 28, 2011

Your selection of funds is not planned and appears to be random, despite some good funds and diversity across fund category. You should understand that diversification in style works rather than numbers. You have a banking sector fund and an infrastructure thematic fund accounting for 40 per cent allocation in your portfolio. No doubt these funds offer scope for high returns; they also come with a high degree of risk. It is on account of these risks that thematic or sector funds are not for investors who are new to investing.

These funds are for seasoned investors who have a diversified portfolio and are willing to allocate a small portion to these funds in order to augment their returns. Such investors should be aware of the risks posed by these funds. Moreover, these funds need active tracking and management as their performance depends a lot on market and economic developments.

You will be better of by building a portfolio that is based on the core and satellite approach. This approach will provide the necessary stability and growth for long-term wealth creation. Ideally, you should look at investing 70-80 per cent in core funds and the remaining in satellite funds.

You can have 2-3 funds as core holdings comprising large-cap and large- and mid-cap funds, with the satellite component with sector funds and multi-cap funds to achieve long-term wealth appreciation. This way, the investments have the ability to absorb shocks as well as have the potential to earn higher returns over various market cycles.



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