Investing in mutual funds is one of the most popular ways to grow wealth over time. While most people choose diversified mutual funds that spread investments across various industries, a more concentrated approach has gained momentum. Commonly known as sector funds, they offer a more focused approach to investing. In this blog, we will discuss what sector mutual funds are and their benefits and types.
Meaning of Sector Funds
Sector mutual funds are a subcategory of equity mutual funds. It focuses all its investment into one sector or industry. This differentiates them from diversified mutual funds, which focus on different industries of the economy. The main focus of sector funds lies on an industry’s performance and growth.
It is specifically meant for investors with a high-risk appetite and in-depth knowledge about specific industries. Commonly known as aggressive investors, they venture into high-risk funds to seek high returns.
What are the Types of Sector Funds?
There are different types of sector funds in India that you can invest in. They are:
- Technology Sector Funds: Electronics, IT and software development among others fall under technology sector funds. This offers investors the opportunity to explore the dynamic technological industry.
- Precious Metal Funds: They appeal to people looking to invest in the precious metal sector. This can include gold, silver, palladium or platinum. Investors can capitalise on gains in this market.
- Banking and Financial Funds: They cover banks, investment firms and insurance companies in the sector funds, meaning they provide investors with exciting growth opportunities.
- Communication Funds: The communication sector in India is one of the fastest-growing industries. This fund allows investors to potentially gain returns in internet-related companies and the telecommunication sector.
- Natural Resource Funds: These funds are mainly focused on energy, oil and natural gas, and timber-related industries. This is more suitable for investors who seek long-term growth in the energy sector.
- FMCG Funds: These funds focus on the fast-moving consumer goods sector. They invest in companies producing essential items that reflect demand and stability.
- Real Estate: These funds offer income and growth opportunities for investors in the real estate market.
Key Advantages of Sector Funds
Sector funds offer a wide variety of benefits to those looking to gain higher rewards. They are:
-
Sector Funds Provide a Focused Exposure
Sector mutual funds allow you to focus on one key sector instead of diversifying into different ones. You can focus your investments on the sectors which align with your expectations and strategies.
-
Sector Funds Allow Diversification
Sector funds are also a great option if you want to diversify your portfolio without spreading your investments over multiple industries. They will help concentrate your portfolio into a single sector or industry. This way, if one or two companies in your portfolio do not perform well, others will mitigate the losses incurred.
-
Sector Funds Have Potentially Higher Returns
These funds have the potential to earn high returns as they are focused on a specific sector. They have the potential to outperform other diversified portfolios during market upswings in that particular industry or sector.
-
Sector Funds are Easy to Liquidate
Sector mutual funds do not have a lock-in period. As a result, it is easy for the investors to enter and exit the fund at their own convenience. This also allows them to adjust their investments according to their strategies, market conditions and financial goals.
Ways to Invest in a Sector Fund
If you are willing to take on more risks to invest in an unpredictable market climate, sector funds might be for you. Investing in a sector fund is easy and can be done through:
- Asset Management Companies (AMC)
- Online Platforms
- Branches of the issuing company
When is the Right Time to Invest in Sector Funds?
There is no right time to invest in sector funds. It depends on factors such as industry conditions. However, here are some general guidelines about the appropriate timing:
- When you have a strong outlook on the sector
- During economic cycles favouring a particular sector
- When a sector is undervalued
- When you have a high-risk tolerance
Final Thoughts
With a clear understanding of what is a sector fund, you can begin your journey as an investor. However, it is important to remember that sector mutual funds are for those adventurous investors who seek high-risk opportunities. As these funds concentrate on a specific sector with limited diversity, they become one of the riskiest mutual funds. However, there is a potential for higher gains as well. Hence, you must research thoroughly about the specific industry you want to invest in before making the decision.
At Torus Digital, we offer a 3-in-1 solution for all your banking, trading and demat needs. Install the app today and start your journey with us!
