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Mutual Fund series : Which theme, sector or cap fund?

After having known the benefits of investing of mutual funds, Mutual Fund series : Why mutual funds?, the next obvious question is :

Which mutual fund?

It is as simple as going from A to E.

Let’s go :

A – Theme of the fund:

I decide on the theme of fund to invest into based on the following:

  • My industry knowledge : For me it is important to know the industry that I operate in. Quick example : I do not invest in hybrid or debt funds because I do not know how they invest, where they invest etc (honestly, I was too lazy to find this out, since my focus was equity mutual funds). For this, I try to keep updated on the industries which I am invested in or thinking of investing in (e.g. : invested in Pharma and financials, thinking of IT… though not too convinced now). This means that I need to keep using Industry research resources
  • My consumer understanding : The consumers make or break any industry. The pagers died because customers moved to the mobile phones. I try to focus on those industries, which are either essential for us at any point of life (pharma or financials) or will become a strong player in the economy (agriculture or chemicals). Understanding the customer demographics or customer trends, requires me to keep using Consumer research resources
  • External/Miscellaneous factors: We all live in global world, we watch US TV (Netflix, Amazon Prime), eat Italian food (Pizza and Pasta), and work for Global companies. These correlations make it important for me to know how an epidemic in Africa will affect my investments in Indian pharma companies. I try to keep myself updated by using Miscellaneous trends resources
  • Based on the above, I can choose from any of the following :
    • Energy,
    • Financials,
    • Pharma,
    • Infrastructure,
    • Technology, or whichever sector you like. 

B – Capital based funds :

These are the funds where the investment focus is based on the market cap of the company (total value of the company : # of shares in the market * Current market price/share). These funds can be:

  • Large cap funds : MFs investing in companies with market cap of > Rs 10,000 crore,
  • Mid cap funds : MFs investing in companies with market cap between Rs 2 crore and Rs 10 crores
  • Small cap funds : MFs investing in companies with market cap <Rs 2 crores.

Interesting Note : I could not find name for the companies with a market cap between Rs 10 crores and Rs 10,000 crores. If you know, please let me know 😊

Since these funds are cap based, they invest across the sectors to create a diversified basket of stock investments.

I personally decide on this aspect based on my risk appetite and my socio-economic situation at the time of investments (personally, I tend to be more in the mid and small cap MFs)

C – Concentration (investment focus) and valuation :

Once the theme and type of the fund is decided, this is the next step. The following are important factors for me to know :

  • Stocks : which companies is the fund invested in?
  • Top Sectors : which are sectors in which the fund’s corpus is primarily invested :
    • Pharma : good for me,
    • Infrastructure : negative for me,
  • Top stocks : how is the corpus is spread across the Top stocks, to assess the risk to my money. For example :
    • Pharma sector is good for me, but Top 4 stocks investements are industry laggards is bad for me!! ☹
    • MF invested in pharma, financials and construction sectors, Top 3 stocks investment are from construction industry is super bad for me!!

D – Expenses ratio :

Though a good to know for me, it is not the deciding factor for me. I do not mind this fee since I am looking for long-term investments. My returns will make more than enough returns to cover these costs.

Mutual funds will charge expenses, as follows :

  • Entry load : the expense deducted from your investment before units are allotted to you,
  • Exit load : the expenses deducted from your final amount before the money is credited to your bank account,
  • Expenses fee : a small amount is charged by the MFs for their operational expenses.

This might be a good to know/ important to know factor for some of the potential MF investors.

E – Fund size and investment style :

Size of MFs corpus : the bigger the corpus, might inspire more confidence for some,

Investment style : is the fund more focused on growth companies or value companies (in simple words…..aggressive or safe)?

 

So, do you know now which theme, fund or sector you want to invest in?

 

Next step : How to evaluate “THE FUND” to invest into. The next post is coming soon…..!!… It is here : Mutual Fund series : The final step

Incase you missed the previous post : Mutual Fund series : Why mutual funds?

General Mutual Funds series : Which theme, sector or cap fund?

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