War or peace! These mutual fund categories help investors create long term wealth

When fear over India-Pakistan conflict has dissipated, there is a new war in Iran that started Sunday, while Russia-Ukraine war has been going on for over three years now, and Israel-Palestine conflict, too, continues.

Amid so much of geopolitical tension growing in the wake of Israel-Iran war, investors are likely to be circumspect. When there is uncertainty in the rest of the world, one can see optimism in defensive stocks and sectors which are likely to do well regardless of conflicts. “When there is an uncertainty in the rest of the world, investors can invest in the defensive sectors such as healthcare, pharma, FMCG and consumer durables,” says Sridharan S., founder of Wealth Ladder Direct.

A few everygreen and defensive sectors

I. Pharmaceuticals and healthcare funds: Sectoral funds are those mutual funds which invest a minimum of 80 percent of stocks in a particular sector or theme. A pharma fund, therefore, would typically invest 80 percent of its assets in pharmaceutical companies. For instance, HDFC Pharma and Healthcare Fund, ICICI Prudential PHD (Healthcare and Diagnostics) Fund, Kotak Healthcare Fund and Mirae Asset Healthcare Fund.

These funds invest (over 80 percent) in the stocks of companies such as Sun Pharma, Divis Labs, Cipla, Lupin and Max Healthcare.

II. Consumption or FMCG funds: These funds invest a minimum of 80 percent of their assets in consumption stocks. For instance, Sundaram Consumption Fund, Mahindra Manulife Consumption Fund, Baroda BNP Paribas India Consumption Fund and Kotak Consumption Fund.  

These mutual funds invest in the stocks of companies such as Hindustan Unilever (HUL), Titan, Eternal, United Spirits and ITC, among others 

Are sectoral funds safe?

While the sectors mentioned above are defensive, but is this advisable to allocate large sum of portfolio to one or two sectors only? After all, sectoral funds are riskier than other categories such as index or passive mutual funds. So should one really go big on the sectoral funds including consumption or healthcare? On this, experts believe that the maximum allocation to sectoral funds should not be more than 20 percent of portfolio.

“Investors are recommended not to invest more than 15 to 20 percent of their portfolio to sectoral or thematic funds.  So one should refrain from investing more than that. During the time of conflict, investors can also track gold prices which obviously are a good bet,” adds Sridharan.

Meanwhile, Preeti Zende, founder of Apna Dhan Financial Services, has a different view on this. “For the last couple of years, investors have been facing volatile markets because of numerous geopolitical reasons such as Russia-Ukraine war, Israel-Hamas conflict, and now again Israel-Iran, where there is a war-like situation. But do retail investors really change their investments strategy? I do not think so. The tool to combat any kind of risk is asset allocation. One should keep on investing in equity, debt and gold as per the asset allocation required towards their financial goals,” she says.

“However, one can have some exposure to debt and gold but it is not recommended to make unnecessary changes in investment strategy as a knee-jerk reaction,” she adds.

Note: This story is for informational purposes only. Please speak to a SEBI-registered investment advisor before making any investment related decision.

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