Sectoral mutual funds are funds that invest in a particular sector, as the name suggests. These funds are a type of equity mutual fund that invests across the capitalization of a specific industry, which is expected to grow to accumulate a good corpus.
Moreover, these are the funds that hold the power to offer benchmark-beating returns in a bull market, where the trend favours the sector. Although sectoral funds come with rewarding returns, they can also turn upside down due to their high volatility. Here’s the current list of the best sector mutual funds.
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The top sector funds can work best for:
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.
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.
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.
The factors to be considered before finding the best sector funds and beginning to invest are:
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.
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.
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.
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 –
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-
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.
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.
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.
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.
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.
No, sectoral funds invest in different companies in the same sector.
Sectoral mutual funds come with a large number of risks, making them the most suitable for investors who have a high-risk appetite.
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.
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.
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