Sector Mutual Funds – Concept, Types, Reasons to Invest, Workings & moreLast Updated Date: Nov 24, 2022
This article gives you a sneak peek into Sector Mutual Funds. You can check the perks and demerits of investing in such funds.
The majority of the investors look forward to diversifying their portfolios when it comes to investment.
One of the best ways of diversifying your portfolio is to invest in various types of assets, including debt, equity, real estate, gold, and others.
Besides this, you can also invest in multiple niches of the economy. If you want to invest in a particular sector of the economy, then there are a plethora of mutual funds available out there.
Basically, sector mutual funds tend to support almost all the corpus amount in a particular niche or sector. As compared to benchmark returns, these mutual funds give out better returns.
But these funds are also volatile. Above all here, the investment timing plays a crucial role. So as an investor, you must know when to enter and exit the fund.
About Sector Mutual Funds or Sectoral Funds
Ideally, sector mutual funds are a type of equity mutual funds that invest in a particular sector of the economy. These sectors mostly include infrastructure, utilities, energy, etc.
Sector funds are also known as sectoral funds. They tend to invest in securities of companies that have various market capitalizations.
Above all, investors have the option of investing in some of the best performing securities in a specific niche.
These funds choose to invest in particular sectors or industries, including pharma, banking, real estate, technology, and others.
As per SEBI guidelines, the sector mutual funds tend to invest at least 80% of the corpus amount in particular niches. For instance, a banking fund invests only in banking securities.
Above all, sectoral funds allow you to invest in niches that have great potential to grow. These funds tend to offer great returns only if you invest at the right time.
Besides entering the market at the right time, you also need to exit at the right time. It is mainly because all the sectors in the economy follow the business phases.
The ups and downs prevailing in the cycles of business most likely affect the fund.
No doubt you can earn exceptional returns if you choose a high-growth sectors fund, but you will go through a massive loss during a downfall.
Additionally, all the assets are invested in one sector only, so the risk factor is also high.
The sectoral funds are also a fantastic way to give a boost to your portfolio. But during the market cycles, you need to have some amount of patience.
In simple terms, you can say that sector mutual funds have different flavors but also vary significantly in market capitalization.
You just can’t put these funds in a particular category, unlike small cap, midcap, and large cap funds.
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Types of Sector Mutual Funds
Real Estate Funds – Investors with a small investment amount willing to enter the real estate segment can invest in these funds.
Utility – Investors who look forward to investing in companies that perform well hailing from the utility sector can support them here.
Above all, the utility funds also offer stable dividends to the investors, which is a bonus point.
Natural Resources Funds – Ideally, the natural resources funds tend to invest in companies from the oil and natural gas niche.
Technology – These funds allow investors to invest in the technology sector.
Financial – Ideally, these funds invest in companies from banking, insurance, etc.
Communication – Investors who wish to get exposure to the communication sector can invest here. Most include internet-based companies.
Healthcare Funds – These funds cover almost all pharmaceuticals industries and path labs.
Precious metal Funds – Under these funds, you can get exposure to some of the most precious metals, including gold, silver, platinum, and others.
Find details of other Types of Funds here
Reasons to Invest in Sector Mutual Funds
You need to know that Sectoral funds are your best bets if your portfolio doesn’t have exposure to some of the specific niche.
Through sector funds, you can get exposure to a particular sector that too through diversification.
The best part about sector mutual funds is that you can gain exposure to the entire industry instead of directly investing in a specific stock.
The fund manager invests in a sector which he expects to grow in the future. Additionally, these funds can help investors to hedge their portfolios.
For instance, if you invest in the energy sector, and it rises suddenly, then the other industries might undergo the business cycles, but there won’t be any significant impact on the energy sector.
Hence to hedge the portfolio, investors can choose to invest in a sector fund.
Additionally, the sector also experiences growth when the demand for certain products tend to rise.
Well, when you invest in sector funds, then you can earn excellent returns by investing in companies that perform well.
Things to consider before Investing in Sector Mutual Funds
Before investing in funds, you must look at the past performance of the funds.
Minimize your Exposure
Before you consider investing in sector funds, you must always have a diversified portfolio of regular funds.
It is essential because you are most likely to put all the eggs in one basket. Above all, you must have a strong portfolio, so you must minimize your exposure to 5-10% of the value of the portfolio.
Know the Basics of the Sector
Just like catching an opportunity investing in sector funds go like. Above all, investors must have a piece of excellent knowledge about the industry before investing.
Investors must learn about both the entry and exit opportunities. Besides this, investors need to have an excellent grip over the movement of these funds and how the market elements leave an impact.
In simple terms, sectoral funds are cyclic in nature, so exit timing plays a crucial role.
Learn about Future Opportunities
When you consider the past performance, then you can understand how the fund will move ahead.
Additionally, you need to find out opportunities that will give you a better insight into the future. So these opportunities tell you when to exit or enter the funds.
Find details of all types of Debt Funds here
Who should invest in Sector Funds?
First of all, you need to know that sector mutual funds are not everyone’s cup of tea. No doubt they offer great returns, but at the same time, they are volatile.
If investors fail to get an accurate prediction of the market, then they are most likely to incur a large number of losses. These funds are ideal for investors who have a tremendous risk-taking appetite.
If you are an investor having an investment horizon of 5 to 7 years, then the sector funds are your best bets. Experts say investors should never invest in a business that is out of their understanding.
Hence, as an investor, we advise you to invest in sectoral funds only if you are confident about a particular sector. Above all, you need to understand a specific industry before investing in it.
You can get positive results only if you have some amount of confidence. Lastly, don’t invest more than 10% of the investment corpus in sector funds.
How does Sector Mutual Funds work?
Particularly, sector funds tend to invest in a specific sector. There are a plethora of mutual funds available for almost all sectors.
All funds are different with regards to their holdings, even if they belong to the same industry.
Basically, you can say that the sectoral funds are entirely focused on a specific sector, so there is no diversification here.
The fund’s performance entirely depends on the sector’s performance. As compared to other funds, these funds tend to be risky.
If you consider investing here for the long term, then you can get high returns.
Check out all types of Hybrid Funds here
Sector Mutual Funds or Sectoral Funds – Conclusion
If the timing is perfect, then sector funds aren’t inadequate for sure. But before investing, you must consider learning about the sector.
Above all, these funds are ideal for aggressive investors who seek a lot of exposure within a specific industry.
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