Sector mutual funds refer to any equity-based mutual fund where the capital is invested in a specific sector. These sectors can include infrastructure, FMCG, energy, etc. Mutual fund investments are generally considered safer than direct equity investments because the capital is diversified across various sectors. This minimises the risk of losses.
However, since sector funds or sectoral mutual funds focus on a specific line of business only, they tend to operate differently. Only those sectors are chosen for investment, which shows a proven track record of substantial returns. Alternatively, sector mutual funds may also focus on only those zones, which promise maximised future growth.
Before assessing the best sector mutual funds, an investor must know about them in detail.
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The best sector mutual funds invest in a portfolio of the top-performing businesses functioning in the same industry. Doing so not only improves the overall scope of the chosen sector but also builds investor gains.
Types: Sector funds can be broadly categorised into eight classes. These are - natural resources funds, real estate funds, financial funds, communication funds, precious metal funds, healthcare funds, utility funds, and technology funds.
Asset allocation: A sectoral/thematic fund must invest at least 80% of the corpus in stocks of companies belonging to a particular sector. For instance, an FMCG sector fund should invest at least 80% of its assets in the FMCG sector.
Risk-reward ratio: Sector funds are equity schemes that limit investment to just one sector. Thus, the risk factor is high in such schemes, as poor performance of the industry chosen would lead to massive losses. However, if one can choose the correct industry, he/she also stands the opportunity to make immense gains. Therefore, it is a high risk-high reward field.
Short-term Capital Gains Taxes – Best sector mutual funds are equity-based schemes. Thus, if an investor holds the same for less than a year, any profit generated would be counted as short-term capital gains. A flat tax rate of 15% is applied in such cases regardless of the investor’s income slab.
Long-term Capital Gains Taxes – Holding a sector fund for more than a year categorises proceeds from its sale as long-term gains. If the profit is up to Rs.1 lakh in a fiscal year, this concerned amount is tax-free. However, capital gains above this limit are taxed at a flat 10% rate. Indexation benefits are unavailable in such cases.
TDS – 10% TDS is applicable on dividends exceeding Rs.5000.
The top sector mutual funds promise high returns but also face substantial risks. Therefore, such investment options are not apt for every investor. While the potential to earn is considerable, so are the chances of facing immeasurable losses. Weathered investors with at least 5-7 years of experience regarding mutual funds investment can opt for such schemes.
Additionally, investors must possess proper knowledge regarding a particular sector and its overall performance before investing in the same. Without such an in-depth understanding, an investor may misread current market trends, ultimately leading to losses. Only with such assessment can one pick the best sector mutual funds from the ones listed.
To simplify the decision of investment, an individual can consider the following factors –
Investment goal – Sector fund investors should be prepared to hold on to their investments for at least five years. Regardless of the sector one chooses, it would take at least a few years to develop or reach its peak. Therefore, such funds are suitable for achieving long-term goals, such as securing retirement corpus.
Risk appetite – Due to the lack of diversification in this option, even the best sector mutual funds face the immense risk of losses if the chosen sector begins to struggle. Thus, investors need to have the capacity to handle such risks when investing in this particular form of mutual funds.
Diversification – Individuals may want to take stock of their existing portfolio before investing in the best sector mutual funds. It’ll let one measure the level of risk they can digest and the scale of returns they can expect by investing in a specific sector.
Past performance – Evaluating a sector’s past performance in response to varying market conditions is necessary. Subsequently, investors should identify opportunities within a sector, which would eventually help it grow.
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.
Now let us jump and check about these top 10 mutual fund schemes.
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