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Sector Mutual Funds | Meaning, Types and Factors

Last Updated : 12 Oct, 2023
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What are Sector Mutual Funds?

Sector mutual funds are equity investment plans that focus on a specific economic sector. Sector mutual funds are also known as sectoral funds, which can invest in stocks of firms with different market capitalisations and security classes. These funds enable investors to invest in the best-performing stocks of a certain sector. Utilities, energy, and infrastructure are examples of such sectors.

Sector funds invest in firms that operate in a certain market segment known as a sector. A sector is made up of one type of firm that sells the same or comparable goods. Some frequent areas include finance and technology. Sector funds enable investors to take particular bets on the growth prospects of a certain industrial area.

Most individuals strive to diversify their financial portfolios by investing in mutual funds. Investing across different asset types, such as equities, debt, real estate, gold, and so on is one method of diversification. Another popular method of diversifying assets is to invest across various sectors of the economy. Mutual funds allow people to invest in specific sectors of the economy.

Types of Sector Mutual Funds

1. Technology Funds: These mutual funds mostly invest in electronics and information technology firms.

2. Financial Funds: It enables investors to invest in the stocks of financial companies. This includes banks, insurance businesses, financial firms, and accountancy companies, etc

3. Natural Resources Funds: These specialize in energy, forestry, oil and natural gas, and timber-related businesses. It is suitable for long-term growth investors.

4. Precious Metal Funds: These sector funds expose investors to gains in precious metals such as gold, silver, platinum, palladium, and so on. 

5. Real Estate: It enables small investors to engage in the real estate industry and profit from both income and growth.

6. Communication Funds: These generally invest in the telecommunications and internet-related industries.

7. Utility Funds: These mutual funds aim to deliver consistent dividends by investing in the utilities sector.

8. Healthcare Funds: These funds make investments in pharmaceutical businesses, for-profit healthcare facilities, lab chains, and biotechnology companies. These also invest in firms that are working on industrial breakthroughs and advancements.

9. FMCG Funds: These sector funds invest in firms involved in the fast-moving consumer goods (FMCG) market.

Factors to Consider Before Investing in Sector Mutual Funds

1. Exposure Limit: Before investing in sector funds, investors should have a well-diversified portfolio of regular funds. Although you will be placing all of your eggs in one basket, you should have a well-balanced portfolio and limit your sector exposure to 5-10% of your portfolio value.

2. Gather Information About the Sector: Investing in sector funds is a way of capitalising on an opportunity. As a result, the investor must have a thorough grasp of the sector before investing. Identifying investment opportunities and exits necessitates an awareness of how the specific sector operates in the economy as well as the factors that impact it. Sector funds typically perform in a cyclical pattern. As a result, time to leave is critical.

3. Analysing Future Opportunities: While analysing previous performance can provide insight into how the fund has performed, it is more important in sector funds to find ways to identify potential possibilities in the particular sector. After all, these possibilities may signify good investment or exit periods.

4. Consider the Subsequent Expenses: To pay their administrative and operating expenditures, AMCs (Asset Management Companies) charge a fee known as the expense ratio. Since sector funds have greater sales charges and yearly fees, you should evaluate the expense ratio to ensure it does not have a substantial influence on your returns.

Why Should You Invest in Sector Mutual Funds?

Sector funds are intended to enable market participation for the investors whose portfolios lack exposure to a particular sector. They can also provide more diversification within a specific sector than would otherwise be achievable. The primary reason an investor would choose a sector fund is the same as for a specific individual stock. The investor believes that the sector is about to experience a period of high growth.

1. Substantial Returns: If a sector does well, the fund associated with that sector can provide significant returns. Each sector follows a cyclical pattern in which it performs well for a set period before declining. Fund managers invest during the downfall to profit immensely afterwards when the sector flourishes.

2. Long-term Gains: It may take some time for thematic funds to prove their true potential. Individuals can use mutual fund schemes to help them achieve long-term financial goals, such as creating a retirement fund or financing wedding or child-education expenditures.

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