I have two years' investment experience. Would it be wise for me to start investing in sectoral funds? Also, is it fine to invest in a fund with exposure to foreign securities?
In my opinion, sector funds do not make any sense for most investors. When it comes to investing in mutual funds, the main objective is to diversify quickly by getting exposure to different sectors through one fund only. And if a fund manager thinks that exposure to one sector needs to be increased or decreased, then he/she can do that easily. However, a sector fund will not be able to do that, as it is supposed to invest in that particular sector only.
All sectors are cyclical in nature and thus, they sometimes do well and sometimes do not. So, the onus lies on the investor. He/she has to be responsible for getting into and out of that sector. Having said that, it's very difficult to predict the cyclicality of any sector. For example, when everybody was optimistic about the performance consistency of Pharma funds, they turned out to be the worst-performing fund category for a while. Therefore, things turn around when you least expect them to. And this is where diversification helps.
Coming to your second question, it is definitely a good idea to invest in foreign securities. They will not only give you greater diversification but also enable you to invest in great companies, which are not necessarily based in India.
However, it is a little difficult to invest in foreign securities directly. Every Indian is allowed to invest abroad up to $200,000 every year directly. But it is a complicated process, as you have to first open an account with the foreign brokerage, place order, choose the company and buy a fund. Nevertheless, domestic funds provide you with that mechanism. Several domestic funds invest up to 35 per cent of their assets in foreign securities. Also, there are plenty of US-domiciled funds sold by Indian fund companies. You can buy a Nasdaq fund, a US Opportunity Fund or invest in the funds that invest a small part of their assets abroad.