Do you want to invest in mutual funds offering a high return? Is beating the benchmark your goal of investing in mutual funds? You may invest in sector funds, a type of equity mutual funds. The fund manager invests predominantly in the shares of companies belonging to a specific sector. For example, the pharma fund invests only in the shares of pharmaceutical companies to generate the maximum return. However, the sector funds are a high-risk investment with exposure to just one sector. Should you invest in sector funds?
A sector fund concentrates its investment towards a single sector of the market. It is more volatile as compared to an equity diversified fund that invests in stocks of different sectors. You may get a good return on investment if the industry shows a robust growth over some time. However, the fund manager must concentrate on the specific sector, even on a poor performance. For example, the fund manager of a banking sector fund must stay with the banking stocks, even if FMCG stocks perform well.
What are the advantages of investing in sector funds?
- You have the opportunity to invest in a sector with high-growth potential and beat the benchmark return.
- The sector fund invests your money in stocks across market capitalisation within that sector. It offers you the opportunity to get maximum return on investment when that sector performs well.
- The fund manager invests your money in the best stocks in the sector.
Also Read: Things to Check Before Investing in an NFO
What are the disadvantages of investing in sector funds?
- The sector fund invests your money in fewer stocks. The investment has a higher risk of concentration as compared to an equity diversified fund.
- You may get low returns from the investment in sector funds, even if the markets are doing well. You take a bet on a particular sector, and a poor performance will dent your portfolio.
- You must have sound knowledge of the macroeconomic situation and the markets to profit from the investment. Sector funds are a risky investment for the first-timers in mutual funds.
Should you buy sector funds?
Invest in sector funds only if you are an aggressive investor. You are concentrating your investment in a particular sector that may boom for some time. However, you will lose money if the specific industry does not perform according to your expectations.
The performance of your investment would depend on the timing and the health of the particular sector. You must have knowledge of the specific industry and the markets before investing in sector funds.
You must invest in sector funds for around three to five years. However, as you are putting money in a particular sector, the ups and downs of the industry will affect the performance of your investment. You could lose money even if you stay with the sector fund for the long-term.
Do not put the money you need for daily expenses in the sector fund. Experts recommend that you limit the investment to around 5% of your portfolio. However, you must pay close attention to factors such as market conditions or policy changes, that may affect your investment in sector funds.
Do not look at the past performance of a sector, before investing in the sector fund. Study the growth opportunities and invest your money only if you can take a bet on a particular industry. You must understand the specific sector and time your investment to get the maximum return. However, you must invest in a sector fund only if it matches your investment goals and risk appetite.
For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in
I write to make complicated financial topics, simple. Writing is my passion and I believe if you find the right words, it’s simple.
