“Should I just go ahead and buy banking sector funds and forget for 10 years.” A question someone asked me recently. I think it is a good time to revisit some of the core concepts of investing in mutual funds. The underlying theme is common sense.
When you invest in a mutual fund you outsource the job of investing to a professional fund manager. Don’t become a pseudo fund manager.
You should aim to build a diversified portfolio while knowing that diversification is the simplest protection against ignorance. No one can safely say what will work tomorrow.
A mutual fund is diversified by itself. Typically they hold about 20+ stocks, some funds hold even upto 100 stocks.
Hence, too many funds in your portfolio is a bad idea. You need not have 2 dozen or 3 dozen funds, that means, 24 or 36 funds, that is over diversification.
Half a dozen, that is, about 6 funds are good enough. And yes, you should remember the names of your funds.
It also means that you should have a minimum of 10% allocation to any fund that you invest in. This allows any fund to make a difference to your portfolio.
The simplest thing you understand is returns or past performance. Everyone wants to bet on the winning horse, including you and me. Yet, it is the most fickle measure and tells little about the quality.
In the long run what will take you far is a good process and focused execution.
Yes, you can say that Sectoral and Thematic funds are focused too. However, they are for opportunistic investors. Those who think they have a sense of when the markets or its particular segments work positively for a particular theme or sector. For example, the banking sector fund.
Greed and fear can turn you into a monkey. Imagine!
We have to make trade offs in investing – chasing highest returns or reaching goals, what would you prefer? Choose and act accordingly.
By the way, have you thought about what do you want your money to do for you?