“Sector Funds” stand tall as the unsung heroes of the financial world. These funds allow you to laser-focus your money on specific industries and capitalize on emerging trends.
This easy-to-digest guide will help you deepen your understanding of sectoral funds. So, without any unnecessary bragging, let’s get started!
Sectoral Or Sector Funds: Meaning & Explanation
Most equity mutual funds invest in multiple sectors for various reasons such as diversification or risk management etc.
Sectoral funds are a type of equity mutual fund that concentrates on a specific sector such as energy, pharma, infrastructure etc.
Sectoral mutual funds enable investors to concentrate their investments in their favourite sectors. Here is a list of some popular sectors among investors;
|1. Healthcare||2. Financial Services||3. Technology|
|4. Real Estate||5. Telecommunication||6. Natural Resources|
|7. Agriculture||8. Energy||9. Renewable Energy|
|10. E- Vehicles||11. Precious Metals||12. Others|
Examples Of Sector Mutual Funds
Sector funds are sometimes misunderstood as thematic funds but they are different. Look at some examples of sectoral mutual funds for clarity.
|Fund Name||Target Sector||3-Year CAGR|
|Nippon India Banking & Financial Services Fund||Financial Services||33.77%|
|ICICI Prudential Technology||Technology||29.49%|
|ICICI Prudential FMCG Fund||FMCG||24.50%|
|SBI Healthcare Opportunities Fund||Healthcare||23.60%|
|Sundaram Financial Services Opportunities||Financial Services||29.20%|
|Aditya Birla Sun Life Digital India Fund||Technology/IT||28.71%|
|Tata India Pharma & Healthcare Fund||Healthcare/Pharma||21.62%|
Note! The provided list is not meant to any financial advice. Investors should various crucial factors to choose a mutual fund scheme.
Associated Risks In Sector Funds
As the saying goes – equity investments are subject to market risks. Sectoral funds are also subject to some risks. Let’s discuss.
1. Sector Concentration Risk
Being concentrated on a specific sector, these funds lack diversification. As a result, the entire fund’s performance may suffer if the chosen sector faces a challenge.
2. Timing Risk
The performance of specific sectors can be cyclical. This may lead to timing risk. Entering or exiting at the wrong time may result in lower returns.
Sectoral funds may show more volatility than diversified funds as their performance is closely tied to a specific sector. Market fluctuations impacting that sector can have a significant impact on the fund’s returns.
4. Limited Options
New emerging sectors may have limited companies or assets to invest in, restricting the fund manager’s ability to create a well-diversified portfolio.
How To Invest In Sector Funds
Nowadays, with a large number of investing platforms available, investing in sectoral mutual funds has become as simple as ordering a pizza online.
The first thing you need is a mutual fund investment account. Many platforms provide it once you open a Demat account with them & complete your KYC.
After opening the account, various sector funds are available to invest in. You choose the desired sector fund & make the payments.
Additionally, there are different investment modes such as SIP, lump sum, dividend payout etc. You can choose according to your needs.
Common Mistakes To Avoid
Human nature comprises committing mistakes. The good thing is you can bypass some common mistakes if you are aware of them.
A. Lack Of Sufficient Knowledge
Having a good knowledge of the selected sector plays a crucial role in the success of your investment goals. It is worth conducting thorough research on the chosen sector to understand current trends, prospects & potential risks.
B. Emotional Investing
Warren Buffet says “the stock market is a device for transferring money from the impatient to the patient”. The message he wants to give is “Do not let your emotions dictate your investment decisions”.
You must make a diversification plan for creating a balanced portfolio. Putting too much of your investment portfolio into a single-sector fund can expose you to excessive risk.
D. Underestimating Risks
Some sectors are inherently riskier than others. Always make investment decisions considering the associated risks to take calculated risks.
Alternative Ways To Invest In Sectors
Even though sector mutual funds are a good investment vehicle, you can explore some other ways to invest in your favourite sectors. First of all, you can directly invest in the companies that operate in the sector of your interest.
The second way is ETF Investing. You can invest in Sector-based Exchange Traded Funds (ETFs). Here are some examples:
- HDFC Banking ETF
- Axis Healthcare ETF
- Kotak IT ETF
- ICICI Prudential FMCG ETF
- Axis Technology ETF
- Nippon India NIFTY Pharma ETF
Third, you may prefer sector-specific Index Funds such as BankNifty, Nifty IT, BSE FMCG etc. Index funds are more cost-efficient than actively managed sector funds due to their low expense ratio.
FAQs – Sectoral Mutual Funds
Can I Do SIPs in Sector Funds?
Yes, mutual fund companies provide various modes to invest in sector funds. You can opt for SIP mode.
Is it Good To Invest In Sectoral Funds?
Investing in sectoral funds can be rewarding if it aligns with your investment strategy, risk appetite and sector-specific expertise. It is to be noted that some sectors carry higher levels of risk. Hence, it’s crucial to avoid overconcentration by diversifying your overall investment portfolio.
Should you invest in Sector Funds?
It depends on various factors whether you should invest in sector funds or not. Considering your risk tolerance, investment goals, strategy etc. may help you decide. It is better to seek expert help.
Which Sector is best to invest in?
Instead of recommending specific sectors, I suggest you conduct a thorough research & analysis of chosen sectors, current market trends, global trends, your risk profile, diversification strategy etc.
Do sector funds pay dividends?
If a sector fund has invested in some dividend-paying companies, investors can choose to receive dividends.
How are sector funds taxed?
Sectoral funds are equity mutual funds & hence they are taxed accordingly.