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Balanced Mutual Funds vs. Sectoral Funds

Mutual funds make investments on the basis of a predetermined objective. While the primary objective of any mutual fund is to give better returns to its investors, it is important for investors to know the route that they would be taking to achieve this.

One of the important points that a mutual fund includes in the prospectus is information regarding the investments it will be making. That determines the basic nature of the fund. For example a debt fund will allocate all funds at its disposable to bonds and debt instruments and equity funds would invest in stocks.

A balanced fund is one that strikes at a balance between equity and bonds instruments. Plainly speaking, a balance fund is a mix of investments in stocks/equity and fixed income instruments and strives to provide a regular income and an opportunity for growth as well.

Sectoral funds, on the other hand, are sector specific funds. For example, an infrastructure fund would invest specifically in shares of infrastructure companies. Since the objective is declared before a sectoral fund is launched there is no scope of the fund shifting its focus midway despite the better judgment of the portfolio manager. Sector funds are basically for those investors who feel that a particular sector has a potential of growth.

However, howsoever small it may be, there is some semblance of a balance in sectoral funds. The fact is that all mutual funds have to keep a part of the funds in cash. This is necessary to cover emergencies presented by a rush of redemptions due to one reason or the other. One reason could be some disturbing sector specific news. Cash in the till, however does not earn anything for the investors. A smart portfolio manager keeps a percentage of reserve cash in debt instruments. Debt instruments are liquid investments, meaning that they can be redeemed anytime without having to register a major loss.

If you are investing in a sector fund the potential is limited to growth within the sector. Balanced funds provide greater opportunity of wealth creation and are also less risky. Much however depends upon the choice of the mutual fund company to whom you have entrusted your money.

Diversified funds are also sometimes referred to as balanced funds even if they are heavily focused on equity. Diversified funds divide their equity exposure in a number of sectors, which provides a balance of sorts. Diversified funds are less affected than sectoral funds when there are sharp sector specific movements in equity prices.

Depending upon the availability of funds you can balance your portfolio by yourself. You can choose to invest in different sectoral funds as well as debt funds. This can actually prove to be more balanced if you can keep yourself updated about market trends and price movements. You can switch between sectors as and when you see that the potential of a particular sector has been tapped. However, when you switch between funds, remember that you cannot always get the best entry or exit price.