Things to Keep in Mind Before Investing in Sector Funds

Picture a scenario where you've spotted an overwhelming growth in the Information Technology (IT) sector. And, now you wonder if there's a way to ride this growth wave without being employed in the industry? Yes, there is! By investing in sector funds, you can invest in stocks of successful IT companies.

Sector or sectoral mutual funds are nothing but equity-linked schemes that invest in a specific sector of the economy. This sector can be IT, FMCG, steel, coal, and many others. These funds invest in companies with varied security classes and market capitalisations within specific sectors. 

Does the opportunity of investing in sector-specific funds excite you? If yes, we request you to consider the following points before diversifying your portfolio to include sectoral mutual funds.

1. Gain in-depth knowledge of the sector before investing

Sure, sectoral mutual funds promise exceptional returns, but you should know which sector to invest in. Out of multiple sectors present in the Indian economy, choosing the right ones requires in-depth research before you park your money.

Therefore, don’t base your decision on a fund's targeted or predicted trend! Delve deep into its historical performance and understand the risk exposure a particular sector delivers. While researching for the best performing sector mutual funds, also be sure to check their expense ratio. This is a fee fund houses charge for managing the fund. Select one with an optimal expense ratio and a solid historical performance.

Additional Read – Should You Invest in Sectoral Funds?

2. Opt for financial advice

There is no shame in seeking professional financial advice when investing in sectoral funds. In fact, given that this investment vehicle can be unpredictable, it might work in your favour to invest some time and money seeking professional advice from an asset management company.

They can tell you whether it's a good time to invest in a particular sector. Often individual investors end up investing in sectoral mutual funds only when the sector is already on a high. Doing this means that you stand to lose money, as the sector has already appreciated to its max potential and will likely only go down from here. But, financial advisory can analyse and predict the sectors with massive growth potential and advise you to park your money in them before they soar. 

3. Allocate a limited percentage while starting out

This is especially important for new sectoral fund investors. Experts recommend that you pack more than 5% to 10% of your corpus in sectoral funds when starting out. Learn the ropes of the game by investing a smaller amount and later pool in more money to grow your wealth.

Anyway, a sufficiently diversified financial portfolio, which has both debt and equity mutual funds, works best. So, allocate a small percentage of your corpus initially, and then invest more as your confidence grows.  

Additional Read – Investing in different asset classes based on their risk

4. Have a no-regret harvest strategy

While getting on the sectoral fund wagon is great, you must also devise an exit or a harvest strategy. What are your criteria to sell your funds and walk away? What is the kind of return you have in mind?

If you think a particular sector has appreciated enough, and now there's growth in other sectors, be prepared to reinvest your profits. Don't let greed get the better of you and have you missing out on other better sectoral opportunities.

The bottom line

Looking for a way to invest in sector mutual funds online? If so, try the Tata Capital Moneyfy website or download the Moneyfy's online mutual fund investment App. Here, you can compare and apply for a number of mutual funds, including sectoral and thematic funds, SIPs, and much more.