What are sectoral funds? Are sectoral funds risky? Who should invest in sectoral funds? Which are the best Sectoral funds?
A sectoral fund is a type of equity or mutual fund that invests in businesses belonging to the same industry or sector. These funds let you gain exposure to particular economic sectors by investing all the money in companies of the same sector.
Sectoral funds invest in companies of all sizes, from large-cap to small-cap, but from the same industry or sector. According to the Securities and Exchange Board of India (SEBI), the fund managers of sectoral funds must invest 80% of the fund’s total assets in equity and equity-related instruments of a specific sector.
Are sectoral funds risky?
Because sector funds have exposure to just one sector, they are very high-risk investment options. Sectoral funds are highly dependent on the performance of the particular sector you invest in.
As they heavily invest in equities of one sector, experts suggest that sector funds are the riskiest class of mutual funds. Such high-risk investments may have a high return potential. Also, the market fluctuations directly influence sectoral funds. If the sector performs well, the fund will provide great profits or returns. But, if the sector performs poorly, you may suffer losses. Sector funds also carry a liquidity risk. Liquidity risk is the risk of incurring losses if the fund manager fails to sell the underlying securities.
Who should invest in sectoral funds?
If you’re an investor who’s willing to willing to take a high risk, sectoral funds are for you. Sectoral funds invest in a specific sector. Investing in them can cause a lack of diversification, making them the riskiest mutual funds available. So, if only you are comfortable with taking such a risk, consider investing in sectoral funds.
It is best to invest in sectoral funds if you are a well-informed, active investor. If you’re a first-time investor, avoid getting into sectoral funds initially. You’ll have to conduct intense research and time your entry and exit, which can be a struggle even for experienced investors. If you are an active investor who remains updated about the news and headlines, you have a better chance of knowing which sector will perform well. If you work in a particular sector, you may have access to insights to help you decide whether to invest in sectoral funds.
If you are looking to make a strategic allocation, sectoral funds may be for you. Some sectors are considered to be cyclical like the auto sector. If you have a high-risk appetite, you can invest in businesses at the bottom of their cycle and wait till they reach the peak. Once they peak, you can immediately sell them. This can help you make great profits by investing in sectoral funds. However, you’ll need experience and patience to invest in sectoral funds.
Which are the best Sectoral funds?
Some of the best performing sectoral funds include:
- Aditya Birla Sun Life Digital India Fund Growth, with 5-year returns of 33.13%
- ICICI Prudential Technology Fund – Direct Plan-Growth, with 5-year returns of 33.39%
- Tata Digital India Fund Regular Growth, with 5-year returns of 34.23%
- SBI Technology Opportunities Fund – Direct Plan-Growth, with 5-year returns of 29.53%
- Franklin India Technology Fund Growth, with 5-year returns of 27.3%
The Bottom line
Sectoral funds may be a high-risk investment option. But with the right research and timing, you can make excellent profits from them. To know more, check ANSPL’s investment options.
