Sectoral funds shot up in 2014, but you need to be careful when investing in them.

Sector funds, for long in the dumps, emerged among the best performing schemes in 2014.

However, chances are the sector on a hot streak today may have already had its time under the sun. Before you rush to grab a piece of this pie, make sure you know what you are getting into.

A sector fund allows you to take concentrated exposure in a particular sector that you believe will do well in the immediate future. With a sector-focused fund, the onus is entirely on you to time your entry into and exit from the fund. This is because even during a secular bull run, rarely does one sector go on a performance spree. The huge gains that can be seen in specific sector funds now may fizzle out as the next sector comes into focus. So, logistics and infrastructure companies may not continue to top the performance charts. On the other hand, sector funds focused on FMCG and technology, which are currently lagging, may make a strong comeback this year if earnings in other sectors continue to disappoint.

Sector funds require proper timing. We normally recommend sector funds to only those investors whose risk profile is moderately aggressive.

A diversified equity fund, on the other hand, would be able to shift in and out of sectors as the story plays out, thus enabling you to harvest the benefits of a possible secular bull run in the equity market without looking for opportunities yourself. Also, you will not have to bother about your investment time horizon with a diversified fund. There is very little reason to opt for a sector fund when a diversified fund can position itself and shift dynamically between sectors.

If at all you are inclined to take a concentrated bet with a sector fund, do so with caution. Do not follow the herd. Try to understand if the rally in a particular sector is really supported by fundamentals. We normally suggest taking an exposure into a particular sector when the going seems to be tough, but there is a definite performance potential in the long term. Her firm started recommending infrastructure funds in 2011, when this sector was under performing in a big way, and although this category has delivered stellar performance in the current year, they are still advising investors to hold onto the funds from this sector. If you go for the current table toppers in the category, you may get hurt. In an economic upturn, the banking sector is likely to participate and outperform for some time.

Often, sector funds invest beyond the sector they are supposed to represent. Sometimes, the sector being represented is itself home to a diverse range of businesses. This lends little certainty to what the fund portfolio will be made of at any given point. For instance, last year's top performer, the UTI Transport and Logistics Fund, is almost like a dedicated automobile sector fund. Its top 10 holdings are concentrated in automobiles and auto ancillaries. The top five holdings of Franklin Build India Fund, which aims to invest in companies engaged directly or indirectly in infrastructure activities, comprises mainly banks. When selecting a sector fund, investors should check if the fund is actually following the mandate.