While investing in mutual funds, most investors seek different ways to diversify their investment portfolio. One way of diversifying is investing in different asset classes like equity, debt, real estate, gold, etc. Another popular way of diversifying investments is by investing in different sectors of the economy. Various mutual funds allow people to invest in a specific sector(s) of the economy. We will now explore Sector Mutual Funds and discuss some important aspects you need to know.
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Sector Mutual Funds are equity schemes that invest in a specific sector of the economy. These sectors can be utilities, energy, infrastructure, etc. Sector Funds, also sometimes referred to as sectoral funds, can invest in stocks of companies with varying market capitalizations and security classes. These funds allow people to invest in the best-performing stocks in the specified sector.
The main characteristics of this fund are:
Expensive
Investing in sector funds can be costly because most are more expensive.
Greater Risk Propositions
Investing in a sector fund may be more risky than investing in a more broadly diversified mutual fund. This risk arises from relying on a single economic sector and failing to diversify.
Greater Returns
Investing in a sector fund may give high returns, particularly if the sector has consistently grown over time.
Divergence
Different sector funds are expected to perform differently depending on several factors, including the time of the economic cycle.
Low Diversification
Sector Funds are limited in their diversification since, unlike other mutual funds, they invest virtually entirely in a single market sector.
Here are the various types of sector mutual funds-
Broadly speaking, sector funds can be classified into the following types:
Some sector funds also focus on a specific sub-sector of the economy like Banking, Energy, etc.
Sector funds invest in companies that operate in the fund's designated sector, which is a subset of the market. A sector is made up of one or more lines of business that offer the same or similar products.
Certain sectors may offer strong growth potential as a result of economically driven investing catalysts; nevertheless, investing in a specific sector carries a high-risk potential and greater volatility because it is a concentrated investment with no economic diversification.
Sector funds do provide some diversification through multiple holdings in a portfolio; nevertheless, because of their specific sector exposure, overall sector funds will have certain risks that affect the entire portfolio. If one sector underperforms, the fund focused on that sector will underperform as well, with no counterbalance from investments in a performing sector.
Sector funds are appropriate for individuals who are willing to take on more risks in order to invest in an unpredictable market climate. You can invest in sector mutual funds through some simple and easy ways, and some of them are:
You can invest in Sector funds for benefits such as:
If a certain industry is expected to grow over time, investing in sector funds might yield large returns.
Sector funds can also outperform inflation if the sector operates inversely proportional to the economy.
The taxes on Sector fund returns are as follows:
Q1. What is a Sector Fund?
A sector fund focuses on a single industry or area. Sector funds are typically offered as mutual funds or exchange-traded funds (ETFs).
Q2. Which Sector Fund is the best?
Sector funds come in various categories, but they are time-sensitive. Therefore, you will have to choose a sector that is performing well in the current economy.
Q3. Are sector funds risky?
Yes, sector funds are risky in nature because the entire portfolio is concentrated on one sector and, therefore, does not offer diversification.
Q4. Who can invest in sector funds?
If you are an investor with a high-risk appetite or have hands-on experience in investing, you can consider investing in these funds.
Q5. What is the investment horizon of a sector fund?
Sector funds are historically known to perform well in the mid and long-term.
Disclaimer - Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
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