In today’s ever-changing dynamic economy, the performance of various industries can be highly unpredictable. From banking and information technology to healthcare and agriculture, different industries go through different phases of growth and performance at times. For instance, the Covid-19 pandemic brought uncertainty to many sectors but opened up new opportunities in others including pharma and technology.
So, is there a way to invest in one particular sector of the economy and leverage these market shifts? Here comes the role of sectoral mutual funds in the picture.
What are sectoral funds?
A sectoral mutual fund is an equity mutual fund that invests in a particular sector, such as IT, banking, or pharmaceuticals. These funds belong to companies with different investment objectives, market capitalisations, and security classes. Investors can benefit from potentially higher returns depending on the performance of the sectors involved.
While these funds may have high growth potential, the risk profile of these investments can be higher as compared to diversified funds as they focus on a single sector and rely heavily on the performance of that particular industry.
Examples of top sectoral funds
- Pharma & healthcare sector funds – These funds typically invest in companies operating in pharmaceuticals, biotechnology, healthcare delivery systems, etc.
- Banking & finance sector funds – For those wanting exposure to banking and financial services companies, banking & finance sector funds can be an ideal choice. These are mutual funds that focus on investments in banks, insurance companies, etc., giving investors a broad view of the sector.
- Technology and related sector funds – Technology is one of the most rapidly evolving sectors that have the potential to offer decent returns for investors who have an appetite for higher risks associated with it.
- FMCG or fast-moving consumer goods – It is a term used for products that have a quick turnover rate because these are items that consumers need regularly, such as food items, beverages, toiletries etc. Investing in an FMCG fund gives you access to stocks from various FMCG companies so you can gain exposure without having to purchase single stocks from each company individually.
How do sectoral funds work?
Sectoral mutual funds function in a similar way as equity funds – investing in the shares of several companies – but with a focus on the same sector. This sector-specific investment strategy capitalises on market conditions. For example, the banking and finance sectors may experience higher growth one day, whereas the tech and pharma sectors may see increased returns another day. Sectoral funds provide an opportunity for investors to stay abreast of news and developments in their respective sectors and adjust their investments accordingly for increased long-term wealth accumulation.
Top benefits of investing in sectoral funds
- Returns
Investing in sectoral funds can be a great way to earn decent returns if you are able to pick the right funds at the right time. For example, if a sector is doing particularly well and its companies are flourishing, then investing in its fund could potentially bring higher yields with greater control of risk. Although there may be fluctuations in these sectors depending on the market conditions, it can still provide an opportunity to capture some of the portfolio gains before they become widely known.
- Diversification in your portfolio
Sectoral mutual funds also offer a way to diversify your investment portfolio. You have the option to invest in funds from different sectors or purchase stocks of various companies belonging to the same sector. By taking advantage of the benefits that come with investing in different sectors, you can create a portfolio that takes advantage of industry trends while reducing the risk.
- Hedging
By diversifying into different sectoral funds, you can ensure that downturns in one sector don’t necessarily lead to losses for the entire portfolio. For example, when oil prices surge, it often has an adverse effect on other sectors that depend on it, such as travel and transportation. In this case, you can choose to invest in sectoral funds belonging to the specific natural resources industry to hedge your investment portfolio.
With the right sectoral funds, you can gain an edge in specific markets and industries depending on the strategy you choose – thus, allowing you to enjoy enhanced returns during certain market conditions. While there can be attractive returns, risks need to be thoroughly researched and factored in. Remember that investing in sectoral funds means different things in different markets, so familiarise yourself with each sector and its associated risks to make sure the strategy aligns with your expected returns.