Everything you should know about Sector Funds – Meaning, Types and Investment

Mutual funds are known for their diversification quality. Investors diversify based on risk or goals. One of the ways investors build an investment portfolio is through exploring funds from different industry or sector. In this article, let’s know about Sector Funds, its meaning, types and investment.

What is a sector fund?

A sector fund is an equity investment scheme thats invests in a business operating in a specific sector of the economy. These sectors can be related to various industry such as pharma, telecom, utility and so on. When you pick sector fund, you get to concentrate only on one sector of the economy. They are nothing but equity mutual fund schemes, which are risky but offer less amount of diversification. Below are the features of the sector funds:

Features of Sectors

  • These funds focus on the stocks of a specific industry sector

  • They are volatile in nature just like the stocks of companies

  • Investors are allowed to hold securities of a single sector

Types of Sector Fund:

Some of the types of sector funds include:

  • Technology: The sector fund invests primarily in electronics and other informational technology used for various applications

  • Financial: Investors can invest in securities of insurance, banking, investment and accounting firms

  • Utilities: These funds invest in utility companies and release dividend pay-outs. This type of fund is suitable for conservative investors looking to invest in fixed-income financial instruments

  • Natural Resources: Suitable for long-term growth investors, Natural Resources fund invests in oil, gas and other energy resources.

  • Real estate: This type of fund provides small investors with an opportunity to explore the gains in the real estate sector. Investors get both income and growth advantage.

  • Healthcare: Healthcare funds covers pharmaceutical companies, biotechnology firms as well as those companies that make breakthrough advances in the industry

Sectors funds are risky as they are exposed to market fluctuations. Some industry sectors perform well in a bullish market and may suffer in bear markets. However, few sectors may earn great earnings even during the recession.

Factors to consider before investing in Sector Funds

  • Analyse past performances: If you’re planning to invest in sector mutual fund, then make sure to review the past performance of the industry fund and take a good look at the opportunities ahead. The insights will help you to time a good investment period and know when to exit the fund.

  • Sector understanding: For any investor, analysing the sector thoroughly is of paramount importance. Before cashing on the opportunity, you should learn about the industry, identify investment opportunities, how the sector reacts to the market volatility, economic challenges, and so on.

  • Exposure Limit: When you consider investing in a sector fund, make sure you have a strong, diversified and balanced portfolio comprising of regular funds. This will help you to limit risk exposure and steady gains.

Who should invest in Sector fund?

  • Aggressive investors seeking exposure within a single sector of the economy

  • Investors who have an in-depth understanding of a particular industry

  • Sector funds are best for you if you are ready to bear cyclical fluctuations and have a long-term investment horizon

Things to note about Sector Funds

  • Investors have to pay sales charges and annual expenses, which is high in terms of sector funds as compared to other fund categories

  • As per a rating agency, MorningStar, an investor should limit exposure to any given sector to 5% in the investment portfolio

  • Investors should be ready for long-term investment period that ranges between 5 years to 10 years in case of sector funds

  • Investors with a short-term horizon face substantial market risks

  • While investing in sector funds, be aware of the exit timings if your fund is not able to meet your goal, macro trends affecting fund value or fund is consistently underperforming

Sector funds are prone to sudden loss and gains depending on the market conditions. They are highly risky; hence it is only suitable for aggressive investors with high-risk profile and having a deep understanding of an industry sector.