What are Sector Funds?

In this article, we are going to read about sector funds which is a type of mutual fund. Mutual fund is a pool of money managed by a trust that collects money from a number of investors sharing similar investment objectives and invests the same in equities, bonds, money market instruments, and/or other securities.

When you decide to invest money in mutual fund, you have option to diversify your investment in different asset classes like equity, debt or hybrid. There are broad varieties of mutual funds.

There is one type of mutual fund which invests in particular sector of economy, known as sector fund. During covid, pharma, online education sector got high demand. So, when you decide to invest in such particular sector which is in demand or you can predict that particular sector will perform well in future then there are chances of good returns because of demand.

Sector specific mutual funds are equity mutual fund. Sector mutual funds invest a minimum of 80% of their assets in a particular sector as per SEBI‘s guidelines. They focus on a specific sector like banking, healthcare, real estate, energy, etc. 

What are the features of sectoral mutual funds?

• Focused: Sectoral funds focus on one particular sector. These funds do not offer diversification. If the industry in which the fund has invested perform well then mutual funds give good return.
• High Risk: It is said “don’t put all your eggs in one basket” which means to distribute risk involved in investment. When we diversify investment like equity, debt and hybrid, and one sector is not giving fruitful return and others are giving expected return then you dont face so much loss as your investment is distributed. But sectoral funds invest in one particular type of industry and it does not diversify its investment. So, sectoral funds can be riskier than other mutual funds.
• High Returns: Particular sector in which it has invested performs well then you can expect a good return. For example, as written above, during covid the pharma industry started growing.
• Hedging: Sectoral funds can be a good hedging investment. A sector inversely proportional to the economy would be a perfect investment to hedge the portfolio.
• Long Term Investment: Sector fund shows better investment if you invest for long term. Short term investment is risky.
• Investing across Capitalisations: Sectoral funds invest in particular sector but investor can split investment across industries with different capitalization like bluechip, mid cap, small cap.
• Research: Investors have to do research before deciding sector. Peak in particular sector can be there for limited period of time.

Who should invest in sectoral funds?

Not every investor can invest in sectoral mutual funds. Investors who have knowledge of industry can invest in as such type of funds are vulnerable to losses. Again, its a long term investment so investor who have knowledge of particular sector and who are confident that sector will perform well, can invest in sectoral funds. Any inaccurate prediction can lead to big losses.

What are the different types of sector funds?

Technology	The technology sector funds invest in stocks of companies that offer technology-based services or produce technology products.
Financials	The financial sector funds invest in financial stocks such as banks, brokerage firms, mutual fund companies, insurance companies, etc.
Utilities	Utilities sector sector funds invest in companies that provide products and services which are related to phones, electricity, and gas.
Health Care	Healthcare sector funds invest in stocks of biomedical companies, hospital conglomerates, pharmaceutical companies, path lab chains, medical instrument makers, etc.
Energy	The energy sector funds invest in industries producing and distributing energy.
Real Estate	Real estate sector funds invest in real estate companies and REITs (real estate investment trusts).
Precious Metals	Precious metal sector funds invest in precious metals mining companies.
Natural Resources	Natural Resources sector funds invest in companies from the oil and natural gas, energy, forestry, and timber-related industries.
Communications	Communication sector funds invest in the telecommunications sector and often include internet-related companies too.
FMCG (Fast-Moving Consumer Goods)	FMCG sector funds invest in personal care products, food and beverages, household products companies and more.

What should you consider before investing in sector fund?

You should know few things before investing in sectoral funds. Following are the things to be considered.

• Fund Objective: You should understand the objective of fund. Few funds invest only 65% of the portfolio in the specified sector. So, this may not give expected return. 
• Time: Timing plays an important role when you invest in sectoral mutual funds. Performance depend on the economic cycle. You need to study in detail about market, sector. To generate good returns from such type of funds, detailed research is required. And you should know when you have to book the profit, which means when is the peak of sector. So, timing plays important role for both entry and exit of the investment. 
• Diversify: You should always play safe risk free game by investing your savings in multiple options. You should always have a diversified portfolio. Exposure to only one sector is risky. Sectoral funds should ideally be only 5%-15% of your portfolio. 
• Past Returns: Past return is part of research before selecting a sector fund but do not entirely depend on the past performance of the sector. You should also study the sector and its future. 
• High Risk: Sectoral funds are high-risk investment options as these funds are exposure to just one sector. Hence, making the investment highly dependent on the performance of that sector. 

Takeaway:

We read what is sector fund, its various types. To select sectoral mutual fund to invest, you need to have knowledge of particular sector before taking decision. You can select investment as per your risk capacity, financial goals, time, etc. You need to understand how particular sectoral funds have performed in past. You should understand that this is a long term investment. You cant expect a good return in short duration. b4investing.com can help you to select the best fund for you.