What is a Sector Fund? How to Find the Best Sector Fund?
Sector Mutual Funds: An Overview
Sector funds are one of the most well-known investment vehicles in the financial industry. These investments are built around a specific sector and aim to outperform other funds within the same sector. Investors can choose from a wide range of sectors, such as utilities, consumer staples, health care, consumer discretionary, and technology. The goal is to direct money towards these stocks as they represent different industries and potential investments.
What Are Sectoral Mutual Funds?
A sector fund is a type of mutual fund that mainly invests in one area of the economy. Since many different kinds of businesses exist in the modern economy, a sector fund can help investors find investment options that fit their needs. For example, someone could decide to put most of their money into the aviation industry to take advantage of its expected growth.
Sectoral Mutual Funds: Who Should Invest in Them?
Investors willing to take risks and looking for ways to make big money can look into sector funds. Since these funds only invest in securities from one industry, the concentration risk is quite high.
You should invest for at least five years to keep your money safe from the stock market. Investors should know how companies in the industry are interested in doing business. If not, you should not use these funds. Sector funds could make up as much as 10% of your investment portfolio.
Characteristics of Sectoral Funds
The following are some of the characteristics of Sector Funds:
- Limited in Diversification: Unlike other mutual funds, Sector Funds invest almost exclusively in a single market sector.
- Term - Most mutual fund managers don't like short-term sector fund investments. A longer horizon allows more time for the industry to mature and realise its full potential.
- Expensive: Investing in sector funds can be pricey since most have a higher price tag.
- Time-bound - Investing in a sector fund has to be time-bound because the benefits of a certain market segment might go down after they reach their peak. To maximise gains, you must analyse the market and investigate the prevailing tendencies in one's chosen field.
- High-Risk Propositions - Compared to more broadly diversified mutual funds, investing in a sector fund may carry a higher degree of uncertainty. This danger stems from relying too much on one economic sector and failing to diversify.
- High returns: Investing in a sector fund may provide high returns, especially if the sector has sustained growth over time.
- Divergence - Different sector funds are projected to achieve varying levels of success depending on many circumstances, including the stages of the economic cycle.
How to Find the Best Sectoral Mutual Funds?
Investors can think about the following things to help them choose the best sector fund:
Fund Objective
Don't forget to think carefully about the fund's primary purpose. For example, only a small number of funds put more than 65% of their portfolios in different sectors. Because of this, the brand's reputation might go down, and investors might not make as much money as they had hoped.
Sector Performance
The economy goes through cycles, and different parts of the economy grow at different rates. Before putting money into it, you should learn as much as you can about the market as a whole by looking into the company's history and the market's past performance. Investors can see how demand changes over time and make decisions based on that information.
Timing the Market
Even though it is well known that you can't time the market. But speed is a vital thing to think about when talking about sector funds. All of these depend on the economic cycle to work. You must study these ETFs in depth to get good returns from them. Market timing is vital for getting into an investment and getting out of one.
Diversify
Keeping a portfolio with many different investments is wise when investing in sectoral funds. It might make the portfolio less likely to have too much in one industry. These should make up less than 5–15% of an investor's total portfolio. But it's always a good idea to talk to a financial counselor or mutual fund salesperson to figure out the best allocation.
Past Returns
You shouldn't make all your decisions based on how well the industry did in the past. The other option is to see the opportunities that will help the industry grow and put money into them.
Top Sectoral Funds in India
| Scheme Name | NAV Direct | Return 1 Year (%) Direct | Return 3 Year (%) Direct | Return 5 Year (%) Direct |
| Tata Digital India Fund | 35.1 | -17.10% | 29.80% | 27.70% |
| ICICI Prudential Technology Fund | 143.8 | -17.70% | 32.40% | 27% |
| Aditya Birla Sun Life Digital India Fund | 125.9 | -15.60% | 29.90% | 26.20% |
| Quant Infrastructure Fund | 24 | 13.20% | 39% | 21.90% |
| Canara Robeco Consumer Trends Fund | 79.5 | 7.30% | 21% | 16.80% |
| BOI AXA Manufacturing | 33.2 | 7% | 26.60% | 13.70% |
| Tata Resources & Energy Fund | 30.9 | -5.70% | 25.90% | 14% |
| SBI Magnum COMMA Fund | 71.1 | -8.30% | 22.40% | 11.50% |
| Aditya Birla Sun Life India GenNext Fund | 160.8 | 4.70% | 19.50% | 14.90% |
| Nippon India Pharma Fund | 308.1 | -5.60% | 26.90% | 17.40% |
| ICICI Prudential US Bluechip Equity | 44.6 | -11.20% | 12.90% | 14.50% |
(Data as of 21st October 2022)
Disclaimer: The securities quoted are exemplary and not recommendatory. Past performance is not indicative of future returns
Sectoral Funds: How Are They Taxed?
You should know how sectoral funds are taxed before investing. Your sectoral fund capital gains are taxed according to how long you owned it.
- If you sell your assets within a year, you must pay a 15% tax on the earnings as Short Term Capital Gain (STCG).
- Any sectoral fund held for more than a year is taxed LTCG (LTCG). 1 lakh in tax-free gains every year. 10% of profits above 1 lakh are taxed.
Conclusion
As you can see, many types of sector funds are available. Each will focus on a specific market segment and offer investors the chance to reap the benefits of that market segment through their funds. If you enjoy investing in individual stocks but want a more diversified portfolio, sector funds might be right for you. And if you're looking for new options to discuss with clients, these funds might also be worth considering. They provide a broader investment opportunity while maintaining traditional mutual funds' predictability.
This is not an investment advisory. The blog is for information purposes only. Investments in the securities market are subject to market risks, read all the related documents carefully before investing. Past performance is not indicative of future returns. Please consider your specific investment requirements, risk tolerance, goal, time frame, risk and reward balance, and the cost associated with the investment before choosing a fund, or designing a portfolio that suits your needs. The performance and returns of any investment portfolio can neither be predicted nor guaranteed.
Why are sectoral funds risky?
Sector funds are riskier than diversified equity mutual funds since they focus on a specific sector and fewer firms. The fund manager does not have much discretion to shift away from the industry, even if its performance deteriorates.
How do you purchase sector funds?
Investing in specific industry funds is the same as investing in any other mutual fund. You may buy them in your brokerage account. Check the costs as well as the performance when comparing sector funds.
Do you think a sector fund is a suitable long-term investment?
As taking on more risk in the hopes of reaping greater rewards is the very definition of investing, it's crucial to be aware of the dangers and opportunities. Because most topics have a life cycle, sectoral funds may provide better returns in the near term. The problem is that these investments aren't reliable in the long run.