Things to Know Before Investing in Sectoral Mutual Funds
By Akhil Chugh
Date April 30, 2021
What are Sectoral Mutual Funds:
Sector funds are a specialised category of equity mutual funds which invest in specific sectors. According to SEBI, a fund has to invest at least 80% of its assets in stocks from a specific sector such as infrastructure, technology, pharmaceuticals, real estate, banking, etc to be categorised as a sector fund.
In India, below are main sectors covered by sectoral funds:
- Pharma Funds: These mutual funds allow investors to gain exposure to pharmaceutical companies
- Technology Funds: These mutual funds invest in stocks of IT companies
- Banking Funds: These mutual funds invest in stocks of banking sector
- FMCG Funds: These mutual funds focus on investing in stocks of fast moving consumer good companies.
- Infrastructure Funds: These mutual funds offer the investors exposure to stock of companies which benefit from the growth of infrastructure like metals, energy etc
Some sector funds also focus on a specific sub-sector of the economy like, Natural resource funds, Precious metals funds, Energy funds, etc. Sectoral funds focus on a particular sector and aims to benefit from the upside in a particular sector.
Who should invest in Sectoral Mutual Funds:
Sectoral mutual funds are not for everyone. They can give huge returns at times. But they are also vulnerable to high volatility and large losses. Type of investors who should ideally take exposure to sectoral funds are:
- Active & Educated Investors: A first-time investor should not invest into sector funds right away. Active & informed investors who are constantly analysing the macro economic situation of multiple sectors can take a better call on whether & when which sector is going to perform well.
- High Risk Tolerance: Sectoral funds invest in a specific sector and thus lack diversification. This makes it one of the riskiest mutual funds available. So only those investors who are comfortable with taking high risk should consider investing in them.
- Medium-long term investment Horizon: In order to gain from sectoral funds, investors need to have an investment horizon of at least 5 – 7 years.
Best Sectoral Funds to Invest in 2021
*Data as on 29 April 2021
Things to consider before investing in Sectoral Mutual Funds:
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Know the Sector:
A sector fund is an equity mutual fund scheme that invests most of its portfolio in stocks of one particular sector. To gain from sector funds, complete knowledge of sector and its growth drivers is very important. In sectoral funds, entry & exit timing is very crucial. Every sector & industry has its own business cycle. Investing in sectoral mutual funds is like trying to ride a wave. You just want to climb a wave at the right time and then ride it for as long as it stays strong. And then when the wave is about to crash, you just get off it. It needs detailed understanding of the macro economic factors affecting the sector, metrics and key growth drivers of the sector to make the right choice.
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Investment Goals:
Before picking any sectoral funds, clarity of investment objective is crucial. To make the most out of your investment in sectoral funds, you should have an investment horizon of at least 5 – 7 This is because for any sector to reach its peak, it needs a significant amount of time.
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Limit Your Exposure:
Since sectoral funds mainly invest in stocks of particular sector, it lacks diversification. To minimize the risk of exposure to just one sector, Net Brokers suggest to have only 5-10% of your overall portfolio in sectoral funds.
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Don’t Rely on Past Returns:
Looking at only the past return of a sectoral fund while making investment decision is not a right approach. If you are looking at the past 1-2 years of good returns and then investing, it actually means that you are already late for the party. You have already missed out on the best of the returns already. Ideally, you should try to invest when the sectoral up-cycle is starting & for that good knowledge of sector is important. Seek financial help from experts like Net Brokers to make the right choice at the right time.
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Do Your Due Diligence:
Do study the sectors in detail and know how their cycles work rather than going for blind recommendations. A highly recommended sector may or may not be suitable for you; hence, due diligence is advised.
Net Brokers suggests 4 questions that investor should ask himself before investing in any sectoral funds:
- Why is the sector going to perform?
- How long do I plan to stay invested?
- How much should I allocate to this sector without affecting my risk tolerance threshold?
- What is going to be my exit strategy?
If you need help from professional experts to answer these questions for you, download Net Brokers mutual fund app & get in touch with us today.
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