What are Sector Funds?
Sector funds are a specialised category of equity mutual funds which invest in specific sectors. Investments in sectors like FMCG, IT,
banking, pharmaceuticals, among others, are facilitated by these funds. According to SEBI, a fund has to invest at least 80% of its assets in stocks from a specific sector to be categorised as a sector fund.
While equity funds can invest across different segments and companies, the sectoral fund will only focus on a particular sector.
Why Invest in Sectoral Funds?
Though mutual funds are designed to diversify your money, these funds concentrate it in a specific sector. They offer stock-level diversification but not sector-level diversification. They exist so that you can aim to benefit from the upsurge in a particular sector. You can look at sectoral funds when you understand and learn more about each type.
But before you jump onto the sectoral funds' bandwagon, there are certain things to be aware of.
Things to assess before investing in sectoral funds
Not for the uninitiated: While mutual funds are recommended for all kinds of investors, especially those new to financial markets, sector funds do not fall in that category. Given that buying a sector fund is taking a bet on one sector's prospects, such funds may not be ideal for new investors. If at all you decide to, base it on some seasoned research.
Understanding sector drivers: All sectors are not equal or the same. Investing in one sectoral fund is not the same as investing in another which targets a different sector. It is important for you to know the factors that drive a sector before investing in it. Without knowledge of key drivers and metrics that make a sector move, you’d be taking an unrequired risk with your money.
Diversification with a purpose: Though sector funds are concentrated on the basis of their creation, they can be used for diversification. However, the purpose has to be clear – which sector has to be invested in and what percentage of the overall portfolio should be put in such a fund, are questions you need to have clear answers to.
Check portfolio composition: All sectoral funds are not built the same. Even among those investing in the same sector, there are important differences between investment and stock quality. It will be important for you to study these differences and also analyse other factors before you decide to part with your hard-earned money.
Comfort with high degree of risk: Before investing in a sector fund, know that they bring a relatively high degree of risk with them – perhaps, higher than a typical diversified fund. There may be times when the volatility may become unnerving, so do see if you have the suitable risk appetite to make it.
Do Not Follow Fad Sectors – Do study the sectors in detail and know how their cycles work rather than going for blind recommendations. A highly recommended sector may or may not be suitable for you; hence, due diligence is advised.
Sector mutual funds can fulfil an important void in a portfolio but will work for you only if you use them appropriately. Otherwise, you’re better off investing in a diversified
mutual fund.
Mutual Fund Investments are subject to market risks, read all the scheme related documents carefully
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