Mutual funds are an investment mechanism for the pooling of funds against allotment of units whereby such funds are invested in securities for people sharing the same investment objectives. When you intend to invest your money, it is of utmost concern that your investment yields commensurate returns. Thus, when we go around the market looking to invest in mutual funds, it is important to ensure you pick the top-rated ones. The market is replete with jargon and intricacies, especially when it comes to mutual funds. It is hard to understand the nuances if you don’t fully understand what you are getting into. One such term is sector-based mutual funds.
What are sector-focused mutual funds?
Sectoral mutual funds are portfolio schemes that only invest in specific sectors of the economy, such as energy, infrastructure or utilities. Such plans can mean substantial profits when invested in a high-growth potential area where the product demand is high. But there is also a chance of heavy losses in case there is a downturn in the sector. Usually, there is a trend of highly-rewarding situations, followed by rough time periods.
Sector funds fall under the category of equity mutual funds. But unlike most equity mutual fund schemes, they don’t diversify – this is the major point of differentiation. Since these funds will focus all their investments on a specific industry like banking, pharma, information technology, real estate, energy, they put all their eggs in one basket, so to say. Let us look at the pros and cons of investing in sector-specific mutual funds investments.
Pros: Exposure to an under-represented sector in the portfolio
Sector funds are primarily meant to provide market exposure for investors whose portfolios lack exposure in a given sector. Sector equity funds are meant to insert diversification where there isn’t any – so, if an investor or fund manager feels that a particular sector is about to experience a period of consistent and strong growth, he or she may consider investing in sector equity mutual funds to reap the benefits of the growth, especially if the fund wasn’t present previously in his bouquet of investments before.
This is why usually technology sector-related funds are preferred. Innovations can bring in huge returns to technology companies, and investors can potentially benefit from this growth.
Cons: Exposure to a sector that goes down
The cons of investing in a sector-focused mutual fund exist precisely for the same reason as the pros: when you put all your eggs in one basket, you invite the risk of losing it all if something goes wrong. The lack of diversification, which is a characteristic of sector-focused funds, means that you are overexposed to a sector of the market,to undue risk and volatility that comes with it.
Sector mutual funds might also be slightly expensive because the funds are narrower and have smaller economies of scale.
How to invest optimally?
Before investing in the sector-focused or thematic funds, you should take a few steps like:
- Have a diversified portfolio comprising of regular funds before going ahead with sector or thematic funds. Sector-focused mutual funds can be very volatile and the loss incurred could be huge if not managed properly. Diversification is the key.
- Only go for sector funds if you have an understanding and in-depth knowledge of that particular sector or theme, or if your fund manager has experience handling it.
- Make note of the exit timing – sector funds are almost always cyclical in nature.
- When you decide to invest, make sure not to overweight your portfolio with these funds – the risk factor is higher.
With sector funds and industry expertise of the particular sector, you can invest in your financial growth with mutual funds at Finserv MARKETS. Setting up an account is extremely simple. All you need to do is submit your KYC documents and fill up a few details on the Finserv MARKETS website. Once you have invested too, insights on the performance of your funds are made available to you, so you can track your investment’s financial journey. Additionally, Finserv MARKETS provides personalized, exclusive offers based on your risk profile and investment goals.
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