Do you invest in equity mutual funds? If yes, there are higher chances that you are aware of the different sectors, such as banking, healthcare and IT, that make up the various equity funds.
However, did you know you can also take exposure in a specific sector through mutual funds? Yes, sectoral funds are equity mutual funds that invest in a particular industry.
In this article, we will talk about sectoral funds and try to understand if you should invest in sectoral funds.
What are sectoral funds?
Sectoral funds are open-ended equity-oriented mutual fund schemes that mainly invest in companies in a particular industry or sector.
According to the Securities and Exchange Board of India (SEBI), a sectoral fund has to invest 80% of its corpus in a specific category. For example, a banking fund needs to invest a minimum of 80% of its assets in bank stocks.
For example, UTI Transportation and Logistics Fund, Nippon India Pharma Fund, ICICI Prudential Technology Fund, Franklin Build India Fund, and Nippon India Banking & Financial Services Fund are sectoral funds.
When you invest in sectoral fund schemes, say UTI Transportation and Logistics fund, in the equity shares of the company that belong to automobile and auto components and related service companies. The fund also invests in logistics sector. The delivery partner companies of e-commerce sites belong to the logistics sector.
Things to consider before investing in Sectoral funds
It is a high-risk category
As you know that it is an equity-based investment in a sector-centric method. Equity investing comes with the inherent risk of volatility, which cannot be avoided. However, a sectoral fund comes with higher risk than a diversified fund as it invests in one sector.
So, it would be best to invest in sectoral funds after you have invested in diversified equity funds.
Industry expertise
You need to understand the movements of the industry with the movement of micro and macroeconomic factors before making an investment in sectoral funds. When you have a detailed knowledge of the industry, the decision to exit and enter the market becomes easy and might prove to be the right strategy.
Diversification
As sectoral funds are an industry-centric investment strategy, you must diversify your portfolio by investing in diversified equity mutual funds or other fixed-income products. This will help in reducing the portfolio risk.
Advantages of investing in sectoral funds
- If you are bullish on a particular sector or believe that a particular sector is likely to witness spectacular growth in the coming future, investing in that sector through sectoral funds might result in attractive returns.
- Investing in sectoral funds can help diversify your portfolio if you don’t have exposure to that sector.
- You can also benefit from the inherent qualities of equity investment as well. Staying invested in an equity fund for a longer term can help you to get the benefits of compounding.
Conclusion
Investing in sectoral funds can offer potential benefits such as higher returns and portfolio diversification. However, it’s important to keep in mind that sectoral funds can also be more risky because they are more exposed to the performance of a specific sector or industry. Therefore, before investing in sectoral funds, it is important to research and understand the sector, as well as to diversify your portfolio.
Hence, it would be wise to keep minimal exposure to sectoral funds, say less than 10% of your equity portfolio.
It’s also important to consult with a financial advisor before making any investment decisions.
