Is investing in a technology fund or any other sectoral fund suitable for a retiree? To answer that, let's first understand sectoral funds and their nature. A sectoral fund is an equity fund that invests in companies that belong to the same sector. For example, a technology fund would invest in technology companies only. Likewise, there are different funds concentrating on particular sectors like banking, pharma, infrastructure and so on. These funds are mandated to invest at least 80 per cent of their portfolio in the chosen sector. This means that a technology fund will have to mandatorily invest at least 80 per cent in stocks of technology companies.
While this sounds interesting, 80 per cent is a huge number, this can restrict the fund manager. He has to invest that portion irrespective of whether the sector has a good future, or if it performs well or not. Not just technology but all sectoral funds are highly volatile and cyclical. They rise and fall sharply.
One of the reasons why it is suggested to invest through a mutual fund while investing in equities is diversification. Though you continue to diversify your investment across different companies on investing in a sectoral fund, you do not diversify across sectors. This makes them a highly risky proposition. And considering the fact that you are a retiree, you should avoid taking such risky bets. Even as general advice, one should avoid investing in these types of funds because of their narrow mandate. One must ideally choose a well-diversified fund where the fund manager doesn't have any restrictions. For that matter, flexi-cap funds are a better option. Flexi-cap funds can diversify across sectors without any restriction.
Besides, flexi-cap funds do have exposure to technology including many other sectors. Look at the pie chart below. As of May 31, 2022, the category average allocation to technology companies by flexi-cap funds is 12 per cent. So while investing in a flexi-cap fund, you still end up having a reasonable exposure to technology. However, a fund manager may increase or decrease it as and when they feel the need.
But for some reason, if you have a strong conviction, and you really want to invest in a technology fund even beyond the allocation provided by a flexi-cap fund, allocate a very small portion of your portfolio to it. Further, don't invest in one go and rather spread it over a period of time. Also, ensure that this is your long-term money and not required before eight to 10 years.
Suggested watch: Isn't investing in thematic funds better than investing in stocks?
This article was originally published on June 27, 2022.
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