What are sectoral funds? Types & benefits

sectoral funds

A sectoral mutual fund is an equity fund that invests in companies that belong to the same sector or industry. Sectoral funds give investors exposure to specific sectors of the economy.

In other words, sectoral funds invest in industries as varied as utility, energy, or infrastructure. They invest in stocks of businesses with a range of market capitalizations and security classes.

Some of the top sectoral mutual funds in India are:

  • Sundaram Rural and Consumption Fund
  • Franklin Build India Fund
  • DSP BlackRock Natural Resources and New Energy Fund
  • IDFC Infrastructure Fund
  • Aditya Birla Sun Life Banking And Financial Services Fund

How do sectoral funds work?

Sectoral mutual fund managers invest most of the fund corpus in stocks and securities of businesses in a specific sector. They could invest, for instance, in the pharmaceutical, banking, FMCG, IT, and the like. The funds are invested in stocks of all shapes and sizes, meaning they collectively buy shares in big, medium-sized, and small businesses. The goal is to accurately focus the fund’s investments in line with the boom in a particular sector or industry.

Fund managers pay close attention to market trends, stock performances, and the potential for expansion in different industries. They invest in sectors slated to have rapid growth in the near future, helping investors build wealth. The investments may generate massive profits if the timing is correct, but they are also subject to market risks and concentration issues. Financial professionals must have faith in the industry’s potential growth and time the market before investing in sectoral mutual funds in India.

What are the advantages of sectoral funds?

Investments in sectoral funds could fetch you exceptional returns if the sector of your choice outperforms. Not every industry moves in sync with the economy. Sectors perform exceptionally well or terribly badly according to business cycles. Accordingly, the returns would also vary drastically. Therefore, you stand to gain if you can invest in sectoral funds at the proper time based on your research. For instance, investors who bet big on the pharmaceutical sectoral funds during the pandemic made profits of over 27%. In short, your portfolio returns will be excellent and better than those of a well-diversified fund if the sector you believe in does well.

Factors to consider before investing in sector mutual funds

You would do well to consider these factors before investing in sector mutual funds in India.

Limit your exposure

Before investing in sectoral mutual funds, we advise clients to establish a balanced portfolio of conventional funds. Since you’ll be placing all your eggs in one basket, it’s crucial to maintain a solid, balanced portfolio and keep sector exposure to at most 5 to 10% of the total value of your holdings.

Learn about the sector

Profiting from an opportunity is the goal of investing in sectoral mutual funds in India. Investors should have a thorough grasp of the relevant industry before investing. Understanding how the particular sector operates in the economy and its driving forces is necessary to spot investment opportunities and exits. Sector funds often work cyclically, so the timing of entry and exit is crucial.

Assess future opportunities

In sectoral mutual funds, it is vital to discover ways to identify future possibilities in the given area than to look at historical performance, which can provide insight into how the fund has done. After all, these changes may point to advantageous entry or exit points.

Why should you invest in sector mutual funds?

The following category of investors could consider investing in sector mutual funds.

Investors willing to take high risks

Investing in sector mutual funds allows individuals to target particular industries or market sectors, such as technology, healthcare, or financial services. This type of investment strategy offers the potential for higher returns compared to a broadly diversified investment portfolio.

Well-informed and active investors

Sector mutual funds are suitable for investors who are well-informed and actively involved in their investment strategy. The funds come with a higher level of risk, as the performance of the fund is heavily dependent on the performance of the specific sector it invests in.

Investors looking to make tactical allocation

Investing in sector mutual funds can also be an effective way for investors to make tactical investment allocation decisions, helping to benefit from market trends and conditions within the specific sector.

Taxation on sectoral funds

Taxes can make or break your investment returns. You must educate yourself about assessing the tax implications on returns from sectoral mutual funds. The tenure of your holding would decide the taxes you pay.

Short-Term Capital Gain Tax (STCG)

The profits are measured as short-term capital gains (STCG) if you sell your funds within a year, and the tax rate is 15%.

Long-Term capital gains tax (LTCG)

If you hold a sector-wise mutual fund for more than a year, long-term capital gains (LTCG) taxes will apply. You don’t have to pay any tax on gains up to ₹1 lakh in a financial year. If you make a profit of over ₹1 lakh, you need to pay tax at the rate of 10%.

Conclusion

We have given you the lowdown on sector-wise mutual funds, focusing on their advantages, suitability, and taxation. Each fund invests in a specific industry sector and allows investors to profit from that market segment. Sector funds may be the best option if you want to invest in particular stocks but want a more diversified portfolio. Sector mutual funds provide a more comprehensive range of investment opportunities while preserving the predictability of conventional mutual funds.

FAQs:

What is a sector type of fund?

A sector type of mutual fund is a particular kind of mutual fund that makes investments in specific economic sectors or businesses, such as technology, healthcare, or financial services. These funds allow investors to concentrate their investments in specific market sectors, which may result in better returns. However, investments come with higher risks compared to broadly diversified funds.

Which sectoral mutual fund is the best?

The “best” sectoral mutual fund is a matter of opinion depending on a person’s investment objectives, risk appetite, and market circumstances. It is crucial to consider the fund’s historical performance and management, the current market condition, and any emerging trends in the particular industry.

What are the five types of funds?

The five main types of funds are equity funds, debt funds, balanced funds, money market funds, and hybrid funds. Each type of fund invests in different assets and has its unique investment strategy, risk level, and potential returns. Individuals need to understand the differences between types of funds and choose one that aligns with their personal financial goals and risk tolerance.

Which sectoral fund is best?

The best sectoral fund can vary depending on your investment goals and risk tolerance. It’s recommended to consult a financial advisor or research top-performing sectoral funds for the latest insights.

Is it good to invest in sectoral funds?

Investing in sectoral funds can be profitable but comes with higher risk. It’s suitable for experienced investors with a strong sector outlook. Diversified funds offer broader exposure and lower risk.

What is the difference between a mutual fund and a sector fund?

A mutual fund pools investments across various assets, offering diversification. In contrast, a sector fund focuses on a specific industry or sector, lacking diversification and carrying higher risk.

What is the difference between sectoral and thematic funds?

Sectoral funds focus on a specific industry or sector, lacking diversification. In contrast, thematic funds invest in multiple sectors based on specific ideas, offering higher diversity.

Disclaimer: Investing in mutual funds is subject to market risks. Please read all scheme-related documents carefully before investing. Potential returns from a mutual fund product are not guaranteed. Past performance is not indicative of future results. None of our articles are intended to and should be considered investment/financial advice from CoinSwitch.

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