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What are Sectoral Funds?

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Our economy consists of different sectors such as banking, information technology, pharma, aviation, agriculture and more. Each industry keeps evolving with time and can perform differently during different periods.

For instance, the Covid-19 pandemic opened up various opportunities for growth in sectors like pharma and technology.

Is it possible to invest in such specific sectors to reap the benefit then?

This is where sectoral mutual funds come into the picture. Sectoral mutual funds can help you capitalise on these opportunities by focusing on a particular sector.

So, what are the types of sectoral funds? Sectoral Funds are open-ended equity Schemes investing in various sectors. Sectoral Funds are required to invest at least 80% of its total assets in the respective Theme or Sector it is dedicated to.

Let’s discuss a few:

1. Pharma & Healthcare
The pharma & healthcare sector includes pharma companies, manufacturers of medical and healthcare units, biotechnology and life science technology companies and more.

2. Digital
This sector majorly invests in Information Technology (IT), electronics and more.

3. Finance
The financial sector can include major BFSI (Banking, Financial Services and Insurance companies)

4. FMCG (Fast-Moving Consumer Goods)
This sector comprises personal care products, food and beverages, household products companies and more.

Now, let’s learn more about sectoral funds:

Three Broad Characteristics of Sectoral Funds

  • Higher Risk
    Sectoral funds can be riskier as it limits investment to a particular sector. Therefore, the performance of your portfolio is vulnerable to the dynamics of that sector.
  • Investing across Capitalisations
    Though sectoral funds concentrate on a single sector, they can still diversify by investing across different capitalisations within the industry. Therefore, you can invest across Bluechips and promising mid-caps and small-caps in the sector through a single fund.
  • Research-oriented
    Investment in sectoral funds can be highly research-intensive. The phases of peaks in a particular sector can be limited to a specific period. For example, with the Covid-19 pandemic, technology-based companies could innovate and grow since different ways of business communications were explored.

With these characteristics in mind, here are a few things that you need to consider before investing in a sectoral fund:

  • Limiting your Exposure
    Having sectoral funds as a part of a diversified portfolio with exposure to different sectors and asset classes can help you diversify your risk.
  • Analysing Past Performance
    Like for any other mutual funds, if you analyse the past performance of a sectoral fund, it can give you an idea about how the sector has performed during periods.
  • Understanding the Sector
    Looking at the opportunities and limitations of a sector can help you know better about its future performance. For example, the technology sector keeps disrupting at a faster pace with the development of new and advanced technologies.

    However, other sectors like agriculture might not transform at a similar pace. Therefore, it is important to understand the sector your fund will be focusing on.
  • Investing During Peaks and Plunges
    Like in any other mutual fund, you can invest in sectoral funds equally during peaks and plunges with the SIP (Systematic Investment Plan) route. Regular and systematic investments over time can help you benefit through cost averaging and compounding.
  • Investing for a Longer Horizon
    Sectoral funds are equity-based funds. Equity returns can be more volatile during the short run. Therefore, these funds can be more suitable when you are looking at a longer investment horizon.

Therefore, sectoral funds can be a more suitable addition to your portfolio, provided your portfolio is diversified well. One can invest in these funds in an informed manner with regular and systematic investments. You can also seek financial advice from a certified investment advisor to know if these investments are sufficient for your goals.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully

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