Sector mutual funds are responsible for boosting the expansion of a particular industry by pooling resources from various individuals and investing it. Generally, mutual funds are considered to pose less risk than equity investments, as the capital is spread across various organisations. However, the best sector mutual funds operate a little differently. They mainly target those zones which have a proven track record of high returns, or ones with the highest potential to grow in the future.
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Features of Sector Mutual Fund
Sector mutual funds aim to take advantage of the market situation by investing in those fields which have the highest potential of growth or are already the fastest expanding sectors of the country.
The best sector funds have a portfolio of companies that operate in the same industry. This boosts the expansion of the respective sector, thereby generating higher profit levels, leading to higher returns on such investments.
Two primary types of tax are imposed on mutual funds – the tax on dividends and tax on capital gains.
Tax on dividends is borne by the asset management company managing the Mutual Funds in question. It remains tax-free to the investors who receive this amount.
Capital gains, on the other hand, are subject to nominal rates of taxation as per the Income Tax Act of India. Short term capital gains tax at the rate of 10% is deducted if the holding period of the fund is less than 36 months.
Long term capital gains tax is applicable on funds having a holding period of more than 36 months. Around 15% of the total gain is deductible in such cases.
However, long term capital gains are subjected to adjustment for indexation. This ensures that the value of the capital gains is retained even if there’s a high rate of inflation in the country.
Who Are These Funds Suited For?
These mutual funds are ideal for those who want to generate substantial profits by making calculated investments in those funds which mainly comprise of the leading sectors of a country.
The best sector funds to invest in 2019 mainly comprised of companies operating in the IT, infrastructure, FMCG products, housing finance, etc.
Sector funds go a long way into enhancing the economic growth of a country as well, as heavy capital investments made in a particular sector allow them to operate freely, generating profits. This increases the income of the citizens and thereby their purchasing power, leading to an improved quality of life.
However, these funds are associated with a higher risk, as the performance of a burgeoning sector can falter due to various reasons. Also, performance of a particular industry is heavily dependent on the government policies undertaken. In case of persisting political turmoil in a country, sectors having huge untapped potential and large asset base can underperform as well.
Sector mutual funds generate a large number of profits, provided the investment was made after careful market analysis. The portfolio manager of such a mutual fund assesses the potential and growth level of companies of a particular sector and creates best sector mutual funds likely to generate high revenues.
If this analysis is done correctly, a mutual fund can exploit this untapped potential and extract huge dividend returns. These funds are ideal for individuals looking for a long term investment strategy which will yield beneficial results.
Since these funds are optimal for a longer investment regime, benefits are not usually visible in the short term.
One disadvantage of the best sector mutual funds is that they have higher volatility than regular equity funds. In the case of faulty or inaccurate predictions of the market condition and growth trend, huge losses will be incurred.
Another point to be noted is that since the resource pool is invested in the same sector, in the case of downfall in that particular segment, the entire mutual fund will be affected. There would be no companies compensating for this loss. This multiplies the damage manifold in case of economic slowdown of a particular sector.
Best sector mutual funds to invest in 2019 depend upon the portfolio spread and the sector in which the highest level of expansion is being undertaken. In India, banking and IT sector are expanding at a fast pace, making it profitable for investors to pool their finances. Best performing mutual funds of 2019 pool their resources in this field.
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