How to choose between a large-cap and sector fund

By Morningstar |  08-06-18 | 

For a horizon of five years, which is better – a blue chip fund or a sector fund?

- Nehal

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 also 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.

On the other hand, sector funds tend to focus on a single sector, thereby making it critical for the investor to have a view on the sector. It could be a tech fund, a pharma fund and on so on and so forth. Such funds would be more volatile since the performance is determined only by the underlying factors driving that sector. Sectors might encounter different cycles lasting for varying periods, at times extending beyond five years.

If you have been tracking a sector and believe it is going to be facing some strong tailwinds, then opt for the relevant sector fund. But be prepared for a lot more volatility. Otherwise, opt for a diversified equity fund that invests in large caps.

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