Mutual funds are a great investment vehicle to invest in stocks of companies. Managed by professionals, these funds can offer great returns over a long term, enabling you to generate wealth with relative ease.
There are numerous types of mutual funds, depending on the asset class, company type, and more. Each of this type has its unique characteristics that suit different investor needs. Among these are sector mutual funds, also known as sector funds.
Your sectoral mutual fund investments can also be a great way to diversify your portfolio and leverage the gains. However, you need to know what these funds are and who they are ideal for before you invest.
For answers to the question, “what is a sector fund?”, and to know their benefits, features, and more, read on.
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Sector funds, as the name suggests, are mutual funds where the investment is predominantly in companies from the same sector. The market capitalisation of companies can be large, mid, or small.
This allows you to leverage the performance of companies that are in their nascent stage but have promising future and companies that are well-established. For example, if the sector is finance, the investment will be in BFSI companies and any companies in the financial sector.
An essential point to note is that the fund manager will invest a large portion of the accumulated funds in equities of the sector. As such, are also often referred to as equity sectoral funds. Given this, the risk is significantly higher but so is the return potential.
Here are some of the features and benefits of a sectoral mutual fund:
As mentioned, these mutual funds have a high risk because fund managers invest a large portion in equities. This means that if it performs poorly, the returns may plummet. However, if the sector performs exceptionally, the returns would be significant.
The fund managers of these funds are likely to invest in companies that have different market capitalisation. As such, you can diversify your investment from one mutual fund. This would in turn help you mitigate risks and secure your investment.
Since the investment of sector mutual funds is concentrated, the fund managers do their research to time the market. This ensures that you can get the maximum value from your investments.
Sometimes an industry may take some time to recover or realise its potential. As such, investment in these funds is generally for a mid to long term.
Keeping in mind the features of these funds, the ideal investor in simple terms would be the one who has a high-risk appetite and can invest for a mid-term, if not long. In addition to this, sector funds are ideal for investors who are active and well-versed.
This means that you should be able to monitor and understand the performance or trajectory of the industry. This will allow you to time the market and know the best entry and exit point, maximising your earnings.
Lastly, this mutual fund is ideal for those who can tactically allocate their funds. Since these funds depend on the phase/cycle of the industry, you can enter the market when the industry is at the lowest.
Once it reaches the peak, you can liquidate the investment to make profits.
Investments in high-risk instruments like sector funds require careful consideration to ensure that you don’t jeopardise your current and future wellbeing.
Here are some of the most crucial points you need to remember to choose the best fund:
These mutual funds are high risk and therefore, assessing your risk tolerance is crucial. If you are a risk-averse investor, these funds may not be the right option. Additionally, given the nature of the funds, your ideal investment horizon would be mid- or long-term, not short-term like a vacation.
There are times when an industry would reach its peak and then go down. As such, timing the phase of the sector is crucial, as it enables you to know when to enter or exit the investment. This will help keep your investment secure, while maximising returns.
How well the industry performed in previous cycles will give you an idea of your returns. If the performance was poor, there are chances that it would stay the same in the future, not giving you returns you hoped. However, if the performance was good, you can get good returns.
With the help of certain indicators and research, you can understand the future trajectory of an industry. If it is going to go up, you can get better returns and vice-versa. However, you would still need to monitor regularly after investment to ensure that the industry is evolving and you are getting fair returns.
With these tips and understanding of sector funds, be sure to invest accordingly and make the most of your funds. Remember, diversification is key to ensuring that your investment stays secure.
On Bajaj Markets, you can find numerous investment avenues, including mutual funds. Complete the digital process and start investing seamlessly to secure your financial future.
Sector mutual funds are those where the fund managers invest in the stock of companies from a particular sector. For example, a real estate sector fund will only invest in companies that have operations in real estate.
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