What are sector funds?

As the name suggests, a sector fund is a mutual fund which invests in stocks of companies that operate in a particular industry or sector of the economy.

Since these funds invest in a particular sector, there is no diversification of investment and hence a higher amount of risk is involved. The performance of these funds is dependent on the performance of the industry. These are different from equity funds in the sense that equity funds invest across various sectors and industries while these focus on one particular sector.

Types of sector funds:

• Natural resources sector funds
• Real estate sector funds
• Logistics sector funds
• Precious metal sector funds
• Technology sector funds
• Financial sector funds
• Pharma sector funds
• FMCG sector funds

Sector funds is a category of equity mutual funds that invest in only a specific sector. For example, a banking sector fund will invest in only shares of banking companies. Gold sector fund will invest in only shares of gold- related companies.

In these type of funds diversification is only in that particular sector and not in the entire market. As a result of this the returns in these funds depend on the performance of that sector in particular. While these funds may give higher returns than diversified equity funds but the risk in these funds is also on the higher side, if the performance of that sector goes down because of any reasons like political, economical, social, technological, legal etc these funds are hit the worst vis-à-vis the overall stock markets.

These funds are usually benchmarked to the index of their particular sector like the banking sector fund is benchmarked to NIFTY Bank Index, auto sector funds are usually benchmarked to NIFTY Auto Index and so on.

Investment in these funds should range from 5% to 15% of the total portfolio of an investor because of their risky traits. Also investments in these funds should be timed for entry and exit as these funds are highly cyclical in nature just like the sector that they are focussing on. An investor must keep a watch on the performance and look for any indicators to know when to exit the fund.

Sector funds should not be altogether avoided if someone has a higher risk appetite because they can really enhance returns for the overall portfolio if the call goes right. 

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Some of the top performing sector funds are:

Sector funds as the name suggests are mutual funds which invest in a particular sector or industry. Their performance is aligned with the performance of the sector in which they are investing.

Examples of sector funds include: Banking funds, Pharma funds, FMCG funds, etc.

Equity funds can be broadly classified into equity diversified funds and equity sector funds. Unlike equity sector funds, equity diversified funds invest the amount in multiple industries which are not directly linked to each other in terms of economic impacts. Hence equity diversified funds are less risky as compared to equity sector funds.

For the simple reason that if one company’s stock is not performing well, your entire portfolio is not at risk if you have invested in diversified equity funds. Hence it is always advisable to prefer equity diversified funds over equity sector funds if the risk appetite of the investor is not large enough.

Attached with this answer are the links to some of the equity sector and diversified funds for your quick reference.

When mutual fund invests in stocks of companies in specific sector such as Banking, IT, Pharmaceuticals, etc., these funds are called sector funds. These funds are also called thematic equity funds.

Difference between sector and equity funds:

Equity funds invest in companies from different sectors. For example, TCS, NTPC, Axis Bank , etc can be a part of single equity fund. On the other hand, sector funds comprises of companies of single sector.

Investors can invest in any sector funds from the below mentioned categories:

1. Banking sector funds
2. Technology sector
3. Pharmaceuticals
4. Natural Resources (oil and gas)
5. Real Estate
6. Logistics
7. Precious metals (gold, silver, platinum, etc)
8. FMCG

Risks and Returns:

• These funds are exposed to a single sector hence, the risk exposure is high.
• A particular sector fund comprises of limited stocks and the top performing companies accounts for a major percentage of the fund. Therefore, underperformance of one or two stocks can reduce the returns of the investor and damage the whole portfolio.
• If a particular sector such as technology underperforms, the fund manager has no option or flexibility to invest in other sectors.
• Diversified portfolio funds comprise of different funds from different sectors and have flexibility to switch investments among sectors. This is not the advantage with sector funds.
• If an investor feels that a particular sector will perform in future, investor can invest in that sector. Instead of investing in a particular company, they can choose sector and hence, the investment is diversified among various companies.
• These funds give the highest returns when a particular sector is at peak.  But with greater returns comes the great risk and hence, investor must choose the funds wisely which gives them maximum returns at reduced risk.

Top performing sector funds: