Many MFDs/advisors typically recommend a 15-20% allocation of their investible corpus to sectoral funds. These funds act as kicker in investment portfolio.
Remember that sectoral funds are at the top of the risk ladder and hence more suited to clients with a high-risk appetite.
While you cannot reduce the volatility risk, you can reduce the risk for clients through passive funds.
Here are the key benefits of having sectoral exposure through passive funds/ETFs.
Cost-effective mode of investment
Sectoral allocation through passive funds reduces the cost of taking sectoral risks. Gaurav Rastogi, Founder & CEO, Kuvera believes that many funds have struggled to beat the benchmark in sectoral funds in the past. “The cost of active investing especially in sectoral funds is comparatively higher due to their smaller size. Passive funds offer a cost-effective vehicle of investment. Low-cost is more likely to help investors get better returns.”
Performance does not depend on handful of stocks
An investor can participate in the entire sector through passive funds. The best part of passive funds is that the overall performance does not depend on a handful of stocks. For instance, there are 30 companies in S&P BSE India Infrastructure Index. While active funds cannot hold more than 10% of stocks of a single company, there is no such restriction in passive funds. Passive funds simply mimic the index. In the current market rally, only a handful of stocks have accounted for the growth of infrastructure index. In such a scenario, passive funds are best suited to outperform their active counterparts.
Uniform exposure to sector
As rightly pointed out by Saugata Chaterjee, Co-CBO, Nippon India MF, investors can experience uniform yet dynamic participation. The number of stocks in a particular index remains constant, and hence passive funds give uniform participation to a particular sector. Additionally, the inherent diversification makes passive investing dynamic.
Conclusion
Saugata believes that MFDs should recommend their clients to allocate at least 30% of their sectoral allocation in passive funds. This proportion can be increased gradually in response to the investor experience, he said.
Overall, passive funds/EFTs offer a cost-effective solution to investors with broader access to a sector.
