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Sector Funds

Funds which solely invest in businesses that function in a specific industry or sector of the economy are called sector funds. Sector funds are usually structured as exchanged traded funds (ETFs) or as mutual funds.

Sector funds give the opportunity to investors for taking targeting bets on the appreciation of a potential industry category. Some sectors offer better growth potential due to economically boasted investing catalysts. Sector funds can also be part of a wider portfolio plan with certain sector offering characteristics related for specific portfolio allocations.

A sector fund will have certain portfolio limitations requiring the portfolio manager to choose investment securities for the fund that come within the fund’s specific targeted goal. Sector funds also offer the benefit of diversification of the portfolio through multiple holdings. Nevertheless, overall sector funds also carry individual risks that have an effect on the entire investment portfolio due to targeted sector exposure.

More diligence is required for some sectors and sector fund investing categories than others. Some sectors are also associated with certain market cycles. For example – consumer cyclic stocks like automotive, entertainment, housing, and retail activities. These sectors do well when the economy of a country is booming. Consumer staple stocks include companies operating in food, household items, beverages, home utilities production, etc. are known to be more stable through the year and in all types of market cycles.

Normally, to follow the volatility and risks of a sector, one must monitor its beta. From the year 2014 to 2017, the sector which reported the highest GICS at 1.08 was the technology sector and sector which reported the lowest beta at 0.11 was the utilities sector. From the 3 year period of 2014 to 2017, total return of 17.66% was reported by the technology sector beating the Index’s return of 11.34%. The utilities sector reported a return of 7.33% below the index’s return as anticipated due to its low beta.

Features of Sector Funds

Below are some of the unique features of sector funds-

  • Focused: Sector Funds focus on an individual segment of the market, letting no room for diversification, and depending entirely on the performance of that specific sector.
  • Period: The investment period in sector funds is usually from medium to long term. Short term investments in sector funds are not preferred by fund managers. The longer duration provides adequate time for the sector to grow and reach its potential level.
  • Costly : Investing in sector funds can be a costly proposition, with most of the available for a premium price tag.
  • Fixed duration of the investment : Investing in a sector fund should be set for a fixed duration as once it reaches its peak, the rewards associated with the investment may diminish. It is vital to analyse the market and do deep research to get the most out of a particular sector.
  • Risky: As sector funds rely on a particular industry and lack diversification, they are often considered more risk carrying mutual funds.
  • High returns: If a particular sector is predicted for growth over a period of time, then it is possible to fetch high returns through investing in sector funds.
  • Hedge: Sector fund can also beat inflation, if the sector functions in a manner which is inversely proportional to the economy.
  • Variation : The performance of sector funds depends on the economic cycle and performance, which is dependent on multiple factors.
  • Bullish Investors : Sector funds are ideal for investors who have the capacity to take high risks and are not afraid to take additional risks to invest in an unpredictable market environment.

Popular Sector for Investment

In the last couple of decades, India has become a global hub for industries with many multinational companies setting up their businesses in the country. Below are some of the popular sectors opted by fund managers and mutual fund houses.

Airline industry

The airline industry has seen a boost in the last few years with a number of new entrants due to increase in the number of flyers. Investing in the airline sector can give good returns and give good returns.

Telecommunication

India is one of the countries in the world with most cell phone users and companies are constantly trying to compete with each other to grow their customer base. The companies are making good profits with the growing number of smartphone users in the country.

Real Estate and construction sector

India is a developing country and infrastructure growth is constantly happening. Investing in real estate, especially with major and established real estate companies, will give good returns.

Natural Resources (oil, gold, etc.)

Declining natural resources have caused an exponential increase in rates, with many fund managers looking to take advantage of this situation to get good returns.

Technology

India has seen tremendous growth in IT over the years. Today, every global IT firm has its base in India. This sector is one of the most popular amongst the other entire sector which continues to offer good returns.

Healthcare and nutrition

India offers one of the best and low-cost health care systems in the world. This attracts patients from many foreign countries which find it cheaper to get treated in India rather than their own country. This has led to fund managers to cash in the health care industry and get good returns on the investment.

Pharmaceuticals

The pharmaceutical sector in India has seen constant growth and it is not affected much by the economic circumstances of the market. The technological advancements in the industry have contributed to a large extent for its persistent growth.

Who Should Invest in Sector Funds?

Every investor has his/her goals for investment. There are different characteristics to an investment like time frame, amount, returns, risk factor, etc. Sector funds are best suited for people who don’t mind taking additional risks. Sector funds are typically for investors who have good knowledge of working and market trend of a particular sector. This helps the investor to predict the best time of investment in the fund and predict returns to an extent. Sector funds also come at a premium price tag and hence, investors who have additional funds can go for them. Investors who like to play safe and have limited funds to invest are recommended to look for other options due to the high-risk factor associated with these investments. It is not advisable for people looking for steady, limited returns, primarily due to the high risk associated with these investments.

Top 10 Best Performing Sectoral Mutual Funds 2019

IDFC Infrastructure Fund Growth
Aditya Birla Sun Life Banking And Financial Services Fund Growth
Franklin Build India Fund Growth
Sundaram Rural and Consumption Fund Growth
DSP BlackRock Natural Resources and New Energy Fund Growth
Reliance Power and Infra Fund Growth
Mirae Asset Great Consumer Fund Growth
Kotak Infrastructure & Economic Reform Fund Growth
SBI Magnum COMMA Fund Growth
SBI Consumption Opportunities Fund Growth

FAQs on Sector Funds

How do I choose the best mutual fund to invest in?

Every investor has different goals for investment and hence, best mutual fund to invest in will basically depend on the risk profile and investment goal of the investor. Some of the parameters an investor can look at to choose the best mutual fund to invest in are-

  • Performance ranking
  • Analyse risk and return ratio
  • Expense ratio
  • Fund manager tenure and experience
  • Scheme asset size

Is it good to invest in FMCG mutual fund?

FMCG mutual fund is a sector-specific fund and any sector-specific fund carries a high risk. It is advisable to invest a small portion in such fund for portfolio diversification. It is also important to stay invested in such funds for a longer period to get good returns. As the population of a country like India grows, the FMCG sector has good potential for years to come and the investor can get good returns on investment.

What are sector and thematic funds?

Sector funds and thematic funds both fall in the category of equity mutual funds. These funds are different from diversified equity funds.

The concentration of sector funds relies on specific industries like real estate, telecommunication, pharma, information technology, energy, etc. On the other hand, thematic funds invest in stocks which are well defined around a particular opportunity. Thematic funds may look similar to the sector, but they may consist of several different sectors. Hence, thematic funds are more diverse in nature than sector funds which are only industry specific.

What is a thematic fund?

The thematic fund is specific to a particular theme which will help achieve the fund’s objective. The theme of the fund may vary from being multi-sector, commodity exposure, international exposure, etc. Sector fund may look similar to thematic fund but the scope of the thematic fund is usually wider.

Which sector is best to invest in mutual funds?

The performance of every sector relies on many different factors like season, the condition of the economy, policy change, consumer behaviour, etc. Hence, it is recommended to study and have good knowledge of the working and trend of a particular sector. A sector which may give good returns today need not necessarily give the same returns six months down the line.

Which is the best time for investing in mutual funds?

There is no specific best time for investing in a mutual fund. An investor can start investing through SIP mode as soon as he/she starts earning. SIP has become popular as it does not put the burden of investing lump sum money on investor, plus it helps in wealth creation by taking benefit of rupee cost averaging and power of compounding over time in the investment.

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