What is your opinion about investing in banking-specific sectoral funds?

What is your opinion on investing in banking-specific sectoral funds? Should I continue to invest in them?
- Srikant

Ideally, one should not. This is because while investing in a mutual fund, diversification is a non-negotiable goal. Assuming that you invest in an index fund, one-third of your money is invested in banking stocks. But by investing across a broad-based equity mutual fund, you will be able to diversify conveniently and quickly. The moment you choose to invest in a sector fund, you are agreeing not to diversify your money and invest all of it towards one sector. So, you end up compromising on diversification.

If the banking exposure is a supplementary thing to your existing portfolio, it will lead to too much of concentration because your other funds will most probably have one-third or maybe more or less exposure to banking stocks anyway.

Having said that, I'm hopeful that our banking sector will do well as a lot of cleaning up has happened in public sector banks. While private sector banks are trapped in a big mess, it looks like the regulator has tightened the noose. Further, some of the great banks have turned out to be even bigger and far more rewarding. But I would say that it is important to diversify and not to violate the basic investing principle. You, as an investor, should set out broad inviolable principles at the beginning of your investing journey - and keep diversification at the top.

This article was originally published on February 14, 2020.