Best Sectoral Mutual Funds

The top sector funds can work best for:

1. Investors with a High-Risk Appetite

These funds invest in particular sectors and lack diversification. This makes them one of the most riskiest mutual funds available. So, only the investors comfortable with taking high risks need to consider investing in these funds. 

2. Active Investors with Expertise

If you're a first-time investor, you should avoid diving directly into sector funds. Investment in sector funds requires precise timing of entry and exit, which even experienced investors need help with. It is necessary to conduct an extensive study of the industry. Active investors who stay current on news and headlines can better predict which sectors will do well.

3. Investors Seeking Tactical Allocations

Some sectors tend to be cyclical in nature, such as the auto sector. Investors who have a high-risk appetite for taking exposure in businesses that are at the bottom of the cycle can also make a great deal by investing in sector funds.

An informed investor can invest in a sector that is at the bottom of its cycle and patiently wait for it to reach its top. They can instantly sell it as it hits its peak to book profits.

If you are investing lumpsum in mutual funds and looking forward to estimating your returns, simply use lumpsum calculator. It is a convenient tool that can assist you in generating your prospective returns.

The factors to be considered before finding the best sector funds and beginning to invest are:

1. Investment Goals

Before investing in sector funds, you need to be clear about your investment goals. If you look forward to making the most out of your investment in these funds, you need to have an investment horizon of at least five whole years because for any sector fund to reach its peak, it will take a significant amount of time. 

2. Limiting Exposure

Since the risks are really high on these funds, you should be careful while giving them weightage in your portfolio; you need to limit the exposure to these funds. 

3. Investment Risks

They are concentrated investments, which means they do not offer diversification to your investment portfolio. The lesser the fund's diversification, the higher the risk present in your portfolio.

Unlike other funds that invest in companies across different sectors, these funds are restricted in the confines of a single sector, this stops them from taking advantage of other sectors simultaneously. 

4. Expense Ratio

You will have to keep a clear note of the expenses that bite into your returns, and to manage the fund effectively, you will be charged certain fees and charges. You will have to be aware of these fees to know your exact returns.

Here are some of the notable benefits of investing in sector funds – 

• Substantial returns if the correct sector is chosen: Sector funds have the potential of delivering extremely high returns on investment if the sector that one chooses starts to perform well. Each sector has a cyclical nature, where they perform well for a period before facing a gradual decline. Sector mutual fund investors can invest during such a downward trend so they can gain immensely when the sector performs well eventually.

• All market caps within that sector are held as stocks: When one chooses a particular market segment, stocks from all companies or brands under it are held as stocks. Thus, even though sectoral diversification is absent, each fund still possesses some form of diversification in terms of market capitalisation.

• Achieving long-term goals: As stated previously, the best sector mutual funds require a significant period to reach their true potential. These sector fund options can help individuals achieve financial milestones in their lifetimes, such as marriage, planning for a child, or retirement.

Two investment modes: Investors can buy top sector mutual funds units in two ways: lump sum and SIP. The latter lets one invest a fixed sum periodically, while the former allows people to invest a sum at once.

The risks to consider while investing in the top sector mutual funds are-

1. Limited Diversification

Though sector funds are diversified across companies, they invest only in one sector, which means they lack diversification. This factor leaves the investor in a vulnerable state because when the sector takes a hit, the investment can drop. 

2. Cyclical Nature

Some industries, such as infrastructure and healthcare, are extremely cyclical, which means they are affected by economic cycles and market trends. Investing in a sectoral fund that is heavily reliant on one of these cyclical industries might lead to extremely drastic results.

3. High Risks

Given that these funds are focused in a narrow manner, they are highly risky. The performance of the fund is entirely based on the performance of the sector, and if the sector experiences a downturn, the entire fund can suffer losses. 

4. Enter and Exit Timing

Timing is also another crucial factor to note while investing in sector funds. An investor needs to be aware of the time they enter and exit the fund to generate above-average returns from the fund.

FAQs

Q1. What is the main feature of sector mutual fund?

A sectoral fund is a kind of equity fund that invests in businesses in the same industry or area. These funds allow the investors to get exposure to specific areas of the economy by investing entirely in companies in that industry.

Q2. Do sectoral funds invest only in one company?

No, sectoral funds invest in different companies in the same sector. 

Q3. Who can invest in sectoral mutual funds?

Sectoral mutual funds come with a large number of risks, making them the most suitable for investors who have a high-risk appetite. 

Q4. Are sectoral funds safe to invest in?

For an array of reasons, these funds are among the riskiest investments. Since they are equity funds, they are exposed to market volatility and risk. Secondly, concentrating on a specific sector reduces diversification and makes them riskier due to concentration risks.

Q5. Is it good to invest in sector mutual funds?

Sectoral mutual funds enable you with high returns, which can be, at times, extremely rewarding. But, since their investments are only in one type of sector,, they are more prone to risks. If you have a high-risk appetite, you can allocate at least 10% to these funds. To see profitable results, you will have to stay invested in this fund for the long term. 

Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.