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. There are various mutual funds which allow people to invest in a specific sector(s) of the economy. We will now explore Sector Mutual Funds and talk about some important aspects that you need to know.
What are Sector Mutual Funds?
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.
Broadly speaking, sector funds can be classified into the following types:
- Real Estate Funds – which allow investors with a small investible corpus to participate in the real estate market.
- Utility Funds – which invest in well-performing companies from the utility sector and are usually focused towards offering steady dividends.
- Natural Resources Funds – which are focused on investing in companies from the oil and natural gas, energy, forestry, and timber-related industries.
- Technology Funds – which allow investors to gain exposure to the technology sector.
- Financial Funds – which invest primarily in companies from the financial industry like banking, insurance, accounting firms, etc.
- Communications Funds – which focus on investing in the telecommunications sector and often include internet-related companies too.
- Healthcare Funds – which cover companies and for-profit medical institutions like pharmaceutical companies, path lab chains, etc.
- Precious Metals Funds – which offer the investors exposure to various precious metals like gold, platinum, silver, copper, and palladium.
Some sector funds also focus on a specific sub-sector of the economy like Banking, Energy, etc.
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Why should you invest in Sector Mutual Funds?
If your portfolio lacks exposure in a specific sector(s), the Sector Funds offer a great option to invest in the said sector in a diversified manner. Instead of investing directly in the stocks of companies from the said sector, a Sector Fund allows the investor to gain exposure to an entire sector that is expected to experience growth. Also, sometimes sector funds can help investor hedge their portfolios. For example, if the energy prices suddenly rise, then the other industries might take a hit but the energy sector will experience growth. Hence, investors can invest in a sector fund focused on energy companies to hedge their portfolio.
If the demand for a certain product rises, then all companies belonging to that sector can experience growth. Investing in a sector fund allows you to earn good returns by investing in well-performing companies from that sector.
However, there is a flip side to this too. Since the fund invests primarily in one sector, a downturn can turn into heavy losses.
Factors to consider before investing in Sector Mutual Funds
We always recommend investors to look at the past performance of the fund before investing. Additionally, here are some factors that you can consider before investing in Sector Funds in India:
Limit your exposure
We always recommend that investors should have a diversified portfolio of regular funds before they consider investing in sector funds. Since you will be putting all your eggs in one basket, it is important to have a strong and balanced portfolio and limit your sector exposure to 5-10% of your portfolio value.
Learn about the sector
Investing in sector funds is about cashing in on an opportunity. Hence, it is important for the investor to have an in-depth understanding of the said sector before investing. Identifying investment opportunities and exits requires a good grip over how the specific sector moves in the economy and an understanding of the factors that influence it. Usually, sector funds perform in a cyclic manner. Hence, the exit timing is crucial.
Assess future opportunities
While assessing past performance can help you get an insight into how the fund has performed, in sector funds, it is more important to find avenues to identify future opportunities in the given sector. After all, these opportunities can indicate good investment periods or exit timings.