Are you just starting to invest, and not sure where you sure put your money? Or maybe you have been investing for a while, but are looking at diversifying or experimenting with new investments?
One of the questions that you might want to ask is whether to invest in single-sector or in multi-sector funds.
The main argument for choosing multi-sector rather than single-sector funds is diversification. Diversification is almost a mantra in personal finance, and it’s generally not recommended to invest in a single asset class. So why would you choose to invest in a single-sector fund?
Well, it’s generally not recommended to invest in ONLY a single-sector fund. However, this does’t mean that multi-sector funds are necessarily better. There are advantages in investing in single-sector funds, and you can still diversify while investing in them.
What are single-sector managed funds?
As the name suggests, single-sector managed funds are funds that specialise in a single asset class. There are single-sector funds for many different asset classes such as cash, shares or property. Some funds also specialise in emerging markets, smaller companies or large companies.
Some examples of single-sector funds are REIT’s (LPF’s in New Zealand), mortgage funds and sector ETF’s.
What are multi-sector managed funds?
Multi-sector funds, as the name suggests, are funds that include a mix of investments in different sectors. They usually include different asset classes, such as property, shares and fixed-income investments.
The most common types of multi-sector funds are Conservative, Balanced and Growth. Conservative funds offer more stable and secure income, with emphasis on fixed-term investments. Growth funds focus on variable income. They may offer higher returns in the long-term, but are more volatile in the short term. Balanced funds are in between, and provide a medium-term product for both income and growth.
Advantages of single-sector funds
One of the advantages of investing in single-sector funds is that no fund manager will be excellent in every asset class. So much work and research is required to become knowledgeable about a single field, let alone a variety of them.
Funds managers are humans, and while they can be competent in different fields, they can’t be specialists in everything. They may achieve better outcomes if they focus their efforts in particular fields. If you choose to invest in single-sector funds, you may be able to select the best managers in each sector.
Disadvantages of single-sector funds
Diversification is recommended, and therefore the major disadvantage of single-sector funds is time. For optimal results, the investor needs to spend a good amount of time selecting and monitoring their combination of single-sector funds.
This type of diversification can also be more expensive for the smaller investor than choosing a multi-sector fund.
Advantages of multi-sector funds
Multi-sector funds invest in a range of asset classes. This allows fund managers to shift money as the market changes and make the most of investing opportunities. Generally, due to the size of funds, fund managers have access to investments that smaller investors don’t. In multi-sector funds they have even more options.
Disadvantages of multi-sector funds
The main disadvantage of investing in multi-sector funds is risk. While multi-sector funds are diversified, their performance is associated with one investment manager, which creates risk. This risk is greater if a growth fund is chosen.
However, this can be overcome by choosing a fund with multiple managers that will bring different perspectives and management styles.
What typer of funds do you prefer? Let me know your thoughts in the comments 🙂