Should You Invest in Sectoral Funds?

As a smart investor, you look for different ways to diversify your portfolio and maximise your returns. When you set out to dabble in the rewarding world of mutual fund investments, you will find that there are some funds that allow you to invest in a single sector.

In this guide, we will explore sectoral fundsand help you decide how suitable these investments are for you.

What are sectoral funds?

Put simply, a sectoral fund is an equity fund that invests most of its corpus in companies belonging to a particular sector. As per SEBI’s guidelines, these funds must invest at least 80% of their assets under management (AUM) in a specific industry.

There are various kinds of sectoral funds that invest specifically in sectors like pharma, real estate, technology, healthcare, natural resources, precious metals, energy, banking, FMCG, telecommunications, etc. The idea behind focusing on a particular industry is to capitalise on its potential to grow. As a result, these can generate higher than benchmark returns for investors.

Additional Read: Is it worth taking Pharma sector exposure in your portfolio?

Factors to consider before investing in sectoral funds

You must keep these practical factors in mind before investing in sectoral funds:

Risk exposure

Since these funds pertain to one specific sector, there is little room for diversification. So, they are vulnerable to market volatilities leading to higher risk. On the flipside, this means that more risk can translate to exceptional returns if an industry experiences high growth. Assess your risk profile and choose these funds if you are motivated by the idea of earning attractive returns.

Investment goals

You need to have a clear long-term goal like a education, retirement, wedding, etc. in mind to make the most of your investment. Ideally, your investment horizon needs to be of 5-7 years. This is because a sector takes some time to reach its peak and generate attractive ROI. When it does, investors have plenty of reasons to celebrate.

Past returns and sector performance

Look at the past returns of a sectoral fundbefore making an investment. Compare its historical returns with those of other industries. In short, learn all you can about the sector you are considering for investment. More importantly, assess its future opportunities and potential for growth.

Market timing

The performance of a mutual fund largely depends on the market’s economic cycle. The time of entering and exiting the fund is extremely important. Although it’s not completely possible to time the market, you should at least aim for a strategic move.

For instance, you can invest in a sector at the bottom of its market cycle. Then, you can tactically wait for it to reach a high point. Once it touches its peak, you can sell to enjoy good returns and fulfil your financial needs.

Additional Read: 2021: Sectors to look forward to

The Bottom Line

Investments in sectoral fundscan turn out to be highly rewarding if you do your research and pick the right sector. If you time right, your portfolio can experience an incredible boost. Most importantly, these funds are ideal if you have the willingness to take risk.

The best way to reap investment benefits is to make well-informed decisions. Get all the market information at your fingertips by downloading Tata Capital’s Moneyfy app. Watch, compare and invest in a host of mutual funds effortlessly. Opt for schemes that align with your risk profile, investment objectives, etc. So, get a step closer to fulfil your financial goals with Moneyfy today!