Investing in mutual funds comes with benefits like easy diversification. Investing in asset classes such as equities, bonds, gold, ETFs, real estate, and others is one way to diversify. Another way is to diversify within an asset class. A particular mutual fund’s category allows investors to invest in specific sectors with sector diversification. This article will explore sectoral mutual funds, types of sector mutual funds, advantages, investment profiles etc.
Given the number of investment options available, it is a task to select the right one, with each offering unique benefits. The best is to learn about each investment product to make an informed decision. Sectoral mutual funds are specialised mutual fund products that allow investors to focus on specific sectors.
Sector funds meaning
As the name suggests, sector funds primarily invest in a specific sector and companies operating within the ambit of the industry. The current economy is a mix of multiple sectors, and these funds allow investors to choose a single segment based on their particular requirements. These sectors can be utilities, energy, infrastructure, IT etc. Before investing, it is best to understand sector funds meaning to identify the right investing strategy.
Sectoral funds can invest in stocks of varied market capitalisation and security classes. With targeted investment, investors can invest in the best stocks from a specific sector.
The actual purpose of the fund is to invest in the growing sectors and try to earn significant returns when the boom happens.
Popular sectors for the mutual fund to invest in are the following. The types of sector mutual funds are linked to the choice of the industry.
Aviation
India has made significant developments in the aviation segments, opening more air routes and promoting affordable air travel for passengers. In the last few years, the aviation sector has witnessed steady progress.
Telecommunication
As the country steps towards 5G, the telecommunication industry is one of the primary revenue-generating sectors.
Real estate
Real estate has given a strong performance in the past. Hence, real estate can offer good returns, primarily if you invest in big companies.
Natural resources
The current scenario has pushed the price of natural resources to the sky, prompting fund managers to target natural resource companies.
Technology
The IT sector is one of the significant revenue and foreign currency generators. As an information technology powerhouse, Indian IT firms are among the most sought-after businesses by investors.
Healthcare
India’s healthcare industry is booming, attracting patients from around the world. Certain funds target the healthcare sector to encash its boom.
Pharma
Similar to the healthcare sector, the Indian pharmaceutical sector is another promising sector for investors.
Characteristics of sector funds
Higher risks
Sector funds are riskier than regular funds as it limits investment to a particular sector. It makes these funds vulnerable to the dynamics of the industry.
Investing across market capitalisations
Sector funds allow diversification inside a sector across market capitalisation. Hence, you can invest in blue-chip companies and even in promising small and mid-cap companies from the domain.
Research-oriented
Investing in these funds depends highly on research. The peaks of a sector can last only for a limited period, which requires the fund manager to identify the right time to invest.
Features of sector fund
Here are some unique features of sector funds.
Concentrated
Sector funds concentrate on investing in a single sector, which limits diversification.
Term
These funds are typically medium to long-term investments. A longer tenor provides the time for the stocks to generate returns.
Expensive
Investing in sector funds can be expensive, with many stocks of the sector selling at a premium.
Time specific
Investing in these funds is time sensitive. Studying the market before investing in sectoral mutual funds is imperative to understand the right time to invest in a sector.
Risk and returns
With little room for diversification, investing in these funds is riskier. Sector funds are highly research-intensive, with the fund manager continuously trying to predict the sectoral performance. It is possible to get high returns from these funds by investing in sectors witnessing stable growth for a period.
Hedge
Sector funds can work as a hedge against inflation if the sector’s growth is inversely related to the economy.
Variation
A sector fund’s performance varies with the economic cycle, with differential performance depending on multiple factors.
Aggressive investors
If you are an aggressive investor and don’t mind taking a risk, consider investing in these funds.
Who should invest?
Investment is a matter of personal choice. Investors should select an investment tool based on their risk appetite and overall financial goal.
Sectoral funds are suitable for investors with higher-risk appetites and require an understanding of the market and sector.
There are better choices for investors who want steady income from their mutual funds primarily due to the risks and the costs involved. Investors with additional funds and knowledge can invest in sectoral mutual funds.
Factors to consider before investing
A few things to consider before investing in sectoral funds are the following.
Limit your exposure
If investing in a sector fund, consider diversifying your portfolio with regular funds to balance the risk. You can limit your exposure in sector funds to 5-10 percent of your portfolio value.
Study the sector
Sector funds invest in a sector aiming to cash on its opportunities. Hence, investors must gain an in-depth understanding of the sector. Identifying investment opportunities and exit requires detailed knowledge of how the sector moves with the economy.
Assess future opportunities
These funds require investors to identify investment opportunities in a sector. Analysing past performance can help get insights into the sector’s performance. One must remember that most of these funds are cyclical, and identifying these opportunities indicate good investment periods and exit times.
You can pick an industry and select the best sectoral fund based on your financial goals.
Conclusion
All mutual funds investment involves risk. One can invest in these sectors in an informed manner with systematic and regular investments. A sectoral fund is a more suitable inclusion when your portfolio is diversified well.
FAQs
Why are sectoral funds risky?
Sectoral funds are riskier because they invest solely in one sector, making them vulnerable to specific fluctuations and potential downturns.
How do sector funds work?
Sector funds invest exclusively in companies within a particular sector, capitalising on its growth and specific industry trends.
What are the advantages of sector investing?
Sector investing offers high returns from growth sectors and allows investors to hedge against economic cycles, leveraging sector-specific opportunities.
What should investors consider before choosing a sectoral fund?
Before investing, assess risk tolerance, research the sector’s potential, and evaluate the fund’s management and fit within your overall portfolio.
How can sector funds fit into a diversified investment portfolio?
Sector funds enhance a diversified portfolio by providing growth opportunities through targeted industry exposure, balancing overall investment risk with potential rewards.
