A bluechip or a sector fund?

By Morningstar |  17-05-17 | 

Dhaval Kapadia, Director, Portfolio Specialist, Morningstar Investment Adviser (India) answers queries in The Financial Express, from where the below has been taken.

For a horizon of five years, which is a better bet — a blue chip fund or sectoral fund?

— Ved Bhushan Sharma

Blue chip is the nomenclature used by asset management companies, or AMCs, for funds that invest in large-cap stocks.

Large cap stocks tend to be less volatile than small or mid cap stocks, although over long term periods also tend to generate lower returns than small and mid caps.

Such funds tend to invest across sectors driven by different underlying factors based on the fund manager’s views. This would provide diversification benefits and reduce volatility in returns. This is important if one doesn’t have a strong view on a specific sector.

Sectoral funds tend to focus on a single sector, thereby making it critical for the investor to have a view on the sector. Such funds would be more volatile since the performance is determined by the underlying factors driving that sector. Sectors might encounter different cycles lasting for varying periods, at times extending beyond five years.

Overall, sectoral funds should be considered only if one has a specific view on the sector and can tolerate higher volatility.

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