power play

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We had some loose cash on our hands, and so decided to invest. Our regular investments happen in ELSS schemes, thanks to Section 80C. Besides that, we put some money every year in diversified equity funds and some hand-picked shares. This time, we decided to venture along a different route — sectoral funds.

The idea that immediately came to mind was to put equal amounts in each sector. That sounded nice and easy, and looked like a good way to hedge against bad sectors. But then, isn’t that what a diversified fund does, anyway? In fact a diversified fund is better at it than you putting money in all sectors by yourself. The latter implies that you have given a fixed weightage to every sector and you are unlikely to change it any time. But the management team for a diversified fund are likely to recalculate these weightages quite often, and churn their portfolio accordingly.

We checked the annualised returns on various sectors, and those on diversified funds. It did turn out to be as we expected — rough calculations showed that putting 100 rupees in a diversified fund is much better than putting 20 rupees in five different sectors.

But then, what are sectoral funds for? Its a mixed kind of risk for those who want just that right combination. We have diversified funds on one side, and hand-picked shares on the other. Sectoral funds fall in between — we hand pick the general “kind” of companies when we choose a sector, and the fund is busy hand-picking the individual companies. This seemed just the right kind of arrangement to fill out a hole in our equity portfolio.

The idea here is to place your bets on one or two sectors, and not all of them. The risk is that your bet may go wrong. The benefit is that if the bet goes the right way, you gain more than a diversified investment. And of course, the risk is less than hand-picking shares yourself. So for us, this kind of a risk just fit in with what we are already doing. But for others, this could mean a new kind of risk.

We decided to place a bet on power and infrastructure. We believe its going to be good for the next few years. So we subscribed to the NFO from Sundaram that ends on 11th December, for a three-year close ended fund in the power sector. We also invested some amount in the Tata Infrastructure Fund, besides some routine investments in diversified funds. Now we wait and watch … in the long term, of course.

There’s a key consideration to make when selecting funds, by the way … never put too much money in the same fund house. You don’t know when it could be hit by a scam, or by life in general. That means sometimes you have to choose the runner up instead of the best, but for me, the peace of mind is worth those lesser returns.

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