Here are a few questions to keep in mind when picking a sector fund.

1) Why

Why do you want to invest in this sector?

Do you honestly believe in its fundamentals? For instance, an investor who is of the firm view that India is under banked and Banking is a proxy for growth in the Indian economy would do very well investing in such a sector fund.

An issue here is that a regular equity diversified fund in your portfolio may already have a huge exposure to Banking. But fund managers in a diversified fund keep rotating between sectors so you could still have a sector fund even if the current exposure in your diversified fund is high. On the other hand, if you find that your diversified fund, over very long periods of time, has held a consistently high exposure to Banking, then you can reconsider whether or not you really need that sector fund.

2) Which

Which fund should you invest in?

Within a particular sector, there may be a choice of funds. Take a good look at all of them. What sort of concentrated bets do they take? Does the fund manager gravitate towards a particular market cap? How does he define a sector? For instance, one fund manager may include NBFCs and financial institutions in the investment universe of a Banking fund. Another may stick purely to banks. Also consider their performance over the years with their peer group and benchmark.

Also Check Out: 10 Greatest Traders of the World