In mutual funds, there are two common types of equity funds - diversified and sectoral funds. Let us go through the comparison of two funds.
Choice of Stocks
1. Diversified funds invests in stocks of different sectors and industries.
2. Sectoral funds invests only in stocks of the sector where the fund has the mandate to invest. (eg tech sector funds invest only in tech companies)
1. Diversified funds has a low risk compared to sectoral funds due to investment in various sectors.If a sector performs badly,it can exit from the sector and invest the funds in a better performing sector.
2. Sectoral funds carry a high risk since their investment is concentrated on a set of stocks of a single industry.If the industry performs bad, then the fund will be beaten down heavily. (eg dot com burst in 2000 and recent IT crash)
Who should invest where?
1. A person with thorough knowledge in a sector only should invest in that sector fund.
2. A person with not much of knowledge should opt for a diversified fund and let the fund manager choose the investment sectors.
For all equity investments, regular SIP over a long period of time will bear its own fruit.