What are sector funds?

There are different ways to invest in mutual funds. One way of diversifying is making investments in different asset classes like equity, debt, real estate, gold, etc. One can also diversify investments by investing in mutual funds from different sectors of the economy. 

Sector Mutual Funds

Sector Mutual Funds are equity schemes that invest in a specific sector of the economy including utilities, energy, infrastructure, etc. They are also known as sectoral funds that can invest in stocks of companies with varying market capitalizations and security classes. 

Sector Funds can be classified under different heads according to their nature as under-

  • Technology Funds allow investors to gain exposure to the technology sector.
  • Communications Funds focus on investing in the telecommunications sector and also include internet-related companies.
  • Financial Funds invest primarily in companies from the financial industry like banking, insurance, accounting firms, etc.
  • Precious Metals Funds allow the investors an exposure to various precious metals like gold, platinum, silver, copper, and palladium.
  • Real Estate Funds that allow investors with a small investible corpus to participate in the real estate market.
  • Utility Funds invest in well-performing companies from the utility sector and focus towards offering steady dividends.
  • Natural Resources Funds  invest in companies from the oil and natural gas, energy, forestry and timber-related industries.
  • Healthcare Funds include companies and for-profit medical institutions like pharmaceutical companies, path lab chains, etc.

Some sector funds also focus on a specific sub-sector of the economy like Banking, Energy, etc.

The need to invest in Sector Mutual Funds:

The Sector Funds offer a great option to invest in the said sector in a diversified manner  and instead of investing directly in the stocks of companies from the said sector, a Sector Fund allows the investor to gain exposure to an entire sector that is expected to experience growth. Sector funds can help investors hedge their portfolios. If the natural resources prices suddenly rise, resulting in the other industries taking a hit but the natural resources sector will experience growth. Hence, investors can invest in a sector fund focused on only such companies to hedge their portfolio.

When the demand for a certain product rises, then all the companies belonging to that sector will experience growth. Investing in a sector fund allows an investor to earn good returns by investing in well-performing companies from that sector.

The biggest possible risk is that since the fund invests primarily in one sector, a downturn in that particular sector can result in heavy losses. 

Factors to be considered before investing in Sector Mutual Funds:

It is advisable to look at the past performance of the fund before investing. There are a few more factors that one should consider before investing in Sector Funds:

  1. Learn about the sector-It is important for the investor to have an in-depth understanding of the said sector before investing. Investing in sector funds is about cashing in on an opportunity. Identifying the right kind of investment opportunities and exits requires a good grip over how the specific sector moves in the economy and knowing the factors that influence it. As sector funds perform in a cyclic manner, the exit timing could be crucial.
  2. Limit the exposure-Investors should have a diversified portfolio of regular funds before they consider investing in sector funds. While putting all the eggs in one basket, it is important to have a strong and balanced portfolio and limit the sector exposure to 5-10% of the total portfolio value.
  3. Assessment of future opportunities-While assessing past performance can help one get an insight into how the fund has performed.In case of sector funds, it is more important to find avenues to identify future opportunities in the given sector. Because these opportunities can depict better investment periods as well as proper exit timings.

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Krishna Rath is a SEBI Registered Investment Adviser, and since 2015 has been educating netizens on investments and insurance. Krishna is a fee only SEBI RIA and is Odisha's first SEBI RIA. With background in IT, Krishna is changing the advisory space with new innovations in AdvisoryTech.

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