Sector Funds

While investing in mutual funds, most investors seek different ways to diversify their investment portfolio. One way of diversifying is investing in different asset classes like equity, debt, real estate, gold, etc. Another popular way of diversifying investments is by investing in different sectors of the economy. Various mutual funds allow people to invest in a specific sector(s) of the economy. We will now explore Sector Mutual Funds and discuss some important aspects you need to know.

List of Sector Mutual Funds

• Aditya Birla Sun Life PSU Equity Fund Direct Growth
• Quant Infrastructure Fund Direct Growth
• ICICI Prudential Infrastructure Direct Growth
• Tata Digital India Fund Direct Growth
• ICICI Prudential Technology Direct Plan Growth
• Nippon India Power & Infra Fund Direct Growth
• SBI PSU Direct Plan Growth
• HDFC Defence Fund Direct Growth
• Kotak Infrastructure and Economic Reform Fund Direct Growth
• Invesco India Infrastructure Fund Direct Growth

What are Sector Mutual Funds

Sector Mutual Funds are equity schemes that invest in a specific sector of the economy. These sectors can be utilities, energy, infrastructure, etc. Sector Funds, also sometimes referred to as sectoral funds, can invest in stocks of companies with varying market capitalizations and security classes. These funds allow people to invest in the best-performing stocks in the specified sector.

Features of a Sector Fund

The main characteristics of this fund are:

Expensive

Investing in sector funds can be costly because most are more expensive.

Greater Risk Propositions

Investing in a sector fund may be more risky than investing in a more broadly diversified mutual fund. This risk arises from relying on a single economic sector and failing to diversify.

Greater Returns

Investing in a sector fund may give high returns, particularly if the sector has consistently grown over time.

Divergence

Different sector funds are expected to perform differently depending on several factors, including the time of the economic cycle.

Low Diversification

Sector Funds are limited in their diversification since, unlike other mutual funds, they invest virtually entirely in a single market sector.

Types of Sector Funds

Here are the various types of sector mutual funds-

Broadly speaking, sector funds can be classified into the following types:

• Real Estate Funds – which allow investors with a small investible corpus to participate in the real estate market.
• Utility Funds – which invest in well-performing companies from the utility sector and are usually focused towards offering steady dividends.
• Natural Resources Funds – which are focused on investing in companies from the oil and natural gas, energy, forestry, and timber-related industries.
• Technology Funds – which allow investors to gain exposure to the technology sector.
• Financial Funds – which invest primarily in companies from the financial industry like banking, insurance, accounting firms, etc.
• Communications Funds – which focus on investing in the telecommunications sector and often include internet-related companies too.
• Healthcare Funds – which cover companies and for-profit medical institutions like pharmaceutical companies, path lab chains, etc.
• Precious Metals Funds – which offer the investors exposure to various precious metals like gold, platinum, silver, copper, and palladium.

Some sector funds also focus on a specific sub-sector of the economy like Banking, Energy, etc.

How Does a Sector Mutual Fund Work?

Sector funds invest in companies that operate in the fund's designated sector, which is a subset of the market. A sector is made up of one or more lines of business that offer the same or similar products. 

Certain sectors may offer strong growth potential as a result of economically driven investing catalysts; nevertheless, investing in a specific sector carries a high-risk potential and greater volatility because it is a concentrated investment with no economic diversification.

Sector funds do provide some diversification through multiple holdings in a portfolio; nevertheless, because of their specific sector exposure, overall sector funds will have certain risks that affect the entire portfolio. If one sector underperforms, the fund focused on that sector will underperform as well, with no counterbalance from investments in a performing sector.

How Should You Invest in a Sector Mutual Fund?

Sector funds are appropriate for individuals who are willing to take on more risks in order to invest in an unpredictable market climate. You can invest in sector mutual funds through some simple and easy ways, and some of them are:

• AMC (asset management companies) Websites
• Through applications such as Groww
• Through the issuing company's branch 

Why Should You Invest Sector Mutual Funds?

You can invest in Sector funds for benefits such as:

1. High Potential Returns

If a certain industry is expected to grow over time, investing in sector funds might yield large returns.

2. Hedge Against Inflation

Sector funds can also outperform inflation if the sector operates inversely proportional to the economy.

Taxation Rules of Sector Mutual Funds

The taxes on Sector fund returns are as follows:

• Long-Term Capital Gains - 10% after Rs 1 lakh
• Short Term Capital Gains - 15%
• Dividend Returns - According to the Individual's Tax Slab

FAQs

Q1. What is a Sector Fund?

A sector fund focuses on a single industry or area. Sector funds are typically offered as mutual funds or exchange-traded funds (ETFs). 

Q2. Which Sector Fund is the best?

Sector funds come in various categories, but they are time-sensitive. Therefore, you will have to choose a sector that is performing well in the current economy. 

Q3. Are sector funds risky?

Yes, sector funds are risky in nature because the entire portfolio is concentrated on one sector and, therefore, does not offer diversification. 

Q4. Who can invest in sector funds?

If you are an investor with a high-risk appetite or have hands-on experience in investing, you can consider investing in these funds.

Q5. What is the investment horizon of a sector fund?

Sector funds are historically known to perform well in the mid and long-term. 

Disclaimer - Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.