We decided to face-off diversified equity funds against sector funds and compare their performances over a 1-month period. Critics might argue that a month is too short a time span to draw meaningful results, and we agree with that contention. Mutual funds, especially equity oriented ones should be regarded as long-term investments and not judged over short time intervals. However sector funds (which represent high riskhigh return propositions) can surely be expected to deliver at a time when markets have performed smartly.
Equity Funds: Leaders over a month
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Sector Funds: Leaders over a month
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The results, however, proved to be proverbial eye-openers. Investors in sector funds take on higher risk as compared to those investing in conventional equity funds. The results suggest that they have not been adequately compensated for the risk borne. In fact none of the sector funds could match the returns offered by the top performing equity fund during the period under consideration.
Does that mean sector funds are a bad investment proposition? Not necessarily! There will be instances when sector funds will deliver impressive returns; however the possibility of the same happening consistently over longer time horizons is rather slim. The fortunes of sector funds are closely linked to those of the corresponding sector, as a result there is a chance that they may not benefit significantly even from rising markets as seen presently.
The disproportionate risk levels associated with investing in sector funds necessitates the presence of an informed investor who can time his investments well. The message is simple -- avoid investing in sector funds unless you have a view on the sector. Diversified equity funds continue to be the best bets for the retail investor.