When you compare various mutual funds, you will find that a particular sector’s funds perform well. So, the Sectoral funds either stay at the top of the bottom line. Investing in various sectors of the economy is a great way to widen one’s investment portfolio. Various mutual funds allow investors to invest in specific sectors of the economy. So sectoral funds are basically the equity or equity-related schemes that invest in a specific economic sector. These sectors can be pharma, technology, real estate, natural resources, healthcare, or precious metals. Sectoral funds can also invest in stocks of companies with diverse market capitalization. Thus, these funds allow investors to invest in some of the best-performing stocks of some specific sectors.
Sectoral funds differ in terms of their market capitalizations, investment goals and set of securities. In Spite of investing in some specific sectors, these funds also invest in some sub sectors such as banking, energy, communication etc. Sectoral funds work with the objective of providing exposure to the investors to certain specific sectors. In addition to that, these funds are capable of beating the market returns and offer high rewards.
7 things to keep in mind before investing in sectoral funds:
- Investors should have a varied portfolio of regular funds before investing in sector funds. Since, the returns on investments of a sectoral funds solely depends on the performance of that specific sector, it is essential to have a solid and balanced investment portfolio. The portion of investment in sectoral funds should not exceed more than 10% of your investment capital.
- It is very essential for the investors to have a deep knowledge or understanding of the particular sector before investing. Usually sector funds perform in a cyclic manner. So the entry and exit timings are crucial. One should keep a track of these timings.
- Although assessing the past performance of the given sector gives you an idea about how the fund has performed it is more important to assess the future growth potential. Assessing the future opportunities of the given sector gives you opportunities to decide the good investment periods or exit timings.
- The income from these funds are taxable. The short term capital gains tax is imposed on the income at a rate of 15% if the units are sold within one year from the date of allotment. And the long term capital gains tax is applicable if the units sold exceed Rs. 1lakh within a year from the date of allotment at a rate of 10% without indexation.
- If you invest your money in a sector that is expected to grow over time, then the funds invested tend to increase considerably when the commodity’s demand is more. If the growth of that particular sector experiences continuous demand, then it will be a good investment. An in-depth understanding of the given sector is very essential while investing in sectoral funds, because here the investor plays the role of fund manager.
- The timings of entry and exit should be carefully determined, especially the exit timing, as that will determine your returns on investment. Sudden losses and sudden gains are a part of sector funds investments. So it is advised to carefully track the economic progress of the given sector and be ready to exit wisely.
- If you are a beginner or a first time investor, there are chances that you would neither be aware of the complexities of various sectors nor have an in-depth knowledge of why a certain sector performs well. Only experienced and savvy investors are advised to invest in these funds too in a limited way, as these funds are very risky in nature.
Sectoral funds offer a great exposure and various opportunities to the investors of various sectors in the economy and an option to invest in a diversified manner. If the demand of certain commodities or a specific sector increases then all the companies belonging to that particular sector, or producing those commodities will experience growth.
So investing in a sector fund can earn you good returns by investing in companies performing well in that sector. However, since the funds invest in a particular sector only, so downslide of that sector can cause heavy losses. Active and intellectual investors who often analyze the bigger picture of multiple sectors can be considered ideal for these sectoral funds. Investors who are experienced and have a high-risk tolerance can invest in these funds. Those investors who have a solid investment portfolio and are ready to tackle heavy market fluctuations can consider investing in sectoral funds. Also, investors need to have an investment perspective of three to five years to invest in sectoral funds.