@Walter White
Investors should avoid investing in sectoral and thematic funds, including HDFC Defence Fund.
There are multiple reasons for this.
First, thematic/sectoral funds have a restricted mandate, which tends to increase risk for investors. If the sector or the theme fails to perform, your returns could suffer.
Second, if a sector or a theme is indeed very promising, the fund manager of a plain diversified fund would include it as well. You need not buy a separate fund for that.
Third, it defeats the purpose of investing in a mutual fund. Ask yourself why you started investing in mutual funds in the first place. Probably, you didn’t want to pick stock yourselves and needed a professional fund manager to do that for you. So, when you invest in a thematic fund, you unknowingly work against this by taking a specific call on a sector/theme.
Last but not least, often thematic funds pick stocks across sectors, which gives them a diversified texture. So, they often behave like diversified funds only.
Why pick them when there are better diversified funds available?
One more related thought: you should also avoid investing in new fund offers (NFOs). That’s because the fund is yet to be tested. It’s better to go with a fund that has an established record rather than one with no track record at all. After all, if you prefer going to an experienced doctor for your medical treatment, why should investing in mutual funds be any different?
It’s desirable and highly recommended that the fund you invest in has completed at least one full market cycle comprising a bull and a bear phase. Then only can you know how that fund behaves when the markets rise and, more importantly, when they tank.
