Should i invest in sector funds

Debt mutual funds predominantly invest in fixed-income instruments such as treasury bills, corporate bonds, government securities, and other debt and money market instruments. This article on best debt funds covers the following:. Sector or sectoral funds are a kind of equity funds that concentrate their portfolio towards equities of companies across all market capitalisations of a particular sector. These funds are capable of providing benchmark-beating returns at times when the markets are favourable, and the sector is expected to grow.

Since these funds concentrate their portfolio towards a particular sector, they naturally possess a higher risk of concentration. The losses resulting from these funds can be magnified when a bearish trend grips the markets, and the underlying sector is not performing as expected.

The table below shows the top-performing sector funds based on the past 3-year and 5-year returns:. Sector funds are suitable for aggressive investors or those willing to take higher levels of risk in exchange for the potential to earn overwhelming returns.

The risk of concentration of these funds is on the higher side since these funds invest in equities of a particular sector.

It is essential to stay invested for at least five years to mitigate market volatility. Investors must understand how the companies of the sector they are choosing to invest, go about their business. As of July 31, , The folio count of Sectoral and Thematic funds increased to Global central banks infused unprecedented liquidity in the financial system to tackle the adverse effects of the COVID pandemic.

Most central banks adopted an accommodative monetary policy stance. But honestly, nobody imagined that the Indian equity markets will come such a long way more than double across capitalizations from their March lows. In this rally, Sectoral and Thematic funds have been the biggest beneficiaries see Graph below. The new launches included Sectoral and Thematic Funds and a variety of other mutual fund schemes.

Going forward as well, a couple of Sectoral and Thematic Funds and other NFO launches are lined up by mutual fund houses. Fund houses are making hay while the sun shines, capitalising on the favourable market sentiments in the race to garner more AUM.

In recent times, with awareness about environmental issues, social issues, and governance-related factors on the rise; investors have also shown a keen interest in ESG Funds.

This perhaps indicates that investors switched out of categories that didn't perform and moved into those where wealth creation looked promising. In other words, investors preferred to go with the rising tide and sort of attempted to time their investment moves.

Table 2: Recent performance pushed up the long-term averages of certain schemes. The evaluation of unique equity schemes including Sectoral and Thematic Funds suggests that the remarkable rally since the COVID pandemic in mid and small-caps -- across many sectors -- helped generate market-beating returns and pushed up the longer period averages of most mutual fund schemes, particularly those with dominant exposure to mid-and-small cap companies.

What to expect from Sector and Thematic Funds in and beyond? If excess liquidity got these funds success since the pandemic began in March , normalisation of monitory policies in the major developed markets may cause a quick unwinding. In order to manage the sectoral fund you're planning to invest in, the Asset Management Companies charges you a fee called an expense ratio. This is basically the charge to cover the fund's administrative and operating expenses like the fund manager's salary.

It is charged on an annual basis. It's the post-tax returns that matter. In order to determine that, you should be familiar with how sectoral funds are taxed. The capital gains made as a result of selling your sectoral fund are taxed depending on how long the investment was held by you. Let's look at some of the top-performing mutual funds helming the sectoral fund category. The performance is based on the basis of returns provided by the fund in the last 3 and 5 years.

View all Sectoral Mutual Funds. Besides, they are also not the only way through which you can rank funds. All you need to do is just follow these below-mentioned steps:. Sectoral Mutual Funds. How do Sectoral Funds Work? What are the Advantages of Sectoral Funds? Who Should Invest in Sectoral Funds? Well-Informed and Active Investors: If you're a first-time investor, you should not jump into sector funds right away. Here's a list of sectors , along with examples of stock holdings you may find in them.

Technology sector funds invest in stocks of companies that produce technology products or offer technology-based services. Financial stocks and financial sector funds can include more than just banks and brokerage firms—financials also include insurance companies, mutual fund companies, and financial planning firms. These are companies that sell things that people don't need for daily living. Therefore, consumer cyclical stocks tend to do better when the economy is strong and consumers are spending.

That's why they're sometimes called consumer discretionary or leisure stocks. Consumer staples are nearly the complete opposite of consumer cyclical stocks; companies in the consumer staples sector typically provide products and services needed for everyday life.

These companies manufacture items such as soap, toothpaste, deodorant, and tobacco products. Companies in the utility sector provide products and services related to gas, electricity, and phones. Like consumer staples, utilities will include products or services that consumers still use when times get tough. Therefore, sector funds that invest in utilities can perform better than growth-type sectors, such as technology, when a recession hits. For this reason, utilities are one of the primary defensive sectors.

The energy sector consists of all the industries involved in producing and distributing energy, including oil companies, electric companies, the coal industry, and green energy companies harnessing wind and solar power. You can also buy energy sector funds that are further specified by their emphasis on green energy production. Also known as health or specialty-health, this sector focuses on the health care industry. It includes hospital conglomerates, institutional services, insurance companies, drug manufacturers, biomedical companies, or medical instrument makers.

Health care stocks are also considered defensive stocks because people will still need medical care. The real estate sector funds typically concentrate their holdings in real estate investment trusts, or REITs, which are entities that represent a collection of investors that pool their money together to purchase income-producing properties, such as office buildings and hotels.

Sector funds focused on natural resources will typically invest in commodity-based industries such as energy, chemicals, minerals, and forest products. Precious metals mutual funds don't invest directly into precious metals like gold and silver. Precious metal mutual funds would also be better classified as commodities funds because precious metals aren't considered an industrial sector.

Still, precious metals deserve mention with sector funds because of its nature as an investment that concentrates its holdings into a specialized portion of capital markets.