Sectoral mutual funds are funds that invest in a particular industry. These funds are a type of equity mutual fund that invests across a given industry's capitalisation. Furthermore, these are the funds with the potential to outperform benchmarks during a bull market when the trend favours the sector. Sectoral funds are becoming increasingly popular among investors seeking long-term returns. Choosing the finest sector funds can help you diversify your portfolio and accumulate long-term wealth. Although sector funds provide excellent returns, their extreme volatility might cause them to lose money. Let’s learn about sectoral mutual funds in this blog post.
What are Sectoral Mutual Funds?
Sectoral funds are equity mutual funds that invest in firms operating in a specific industry, such as technology, healthcare, energy, financial services, or any other area. They invest at least 80% of their funds in companies from that sector, which may provide significant returns when the sector performs well. However, this strategy has a higher risk as most funds are invested in one sector only.
List of Best Sectoral Mutual Funds in India 2024- H2 table format
Top 10 Sectoral Funds Overview
How do Sectoral Funds Work?
Features of Sectoral Funds
Who Should Invest in Sectoral Funds?
Factors to Consider Before Investing in Sectoral Mutual Funds
Benefits & Risk of Investing in Sectoral Mutual Funds
How to Choose the Best Sectoral Mutual Funds for Investing?
What are the Returns on Sectoral Mutual Funds & How are They Calculated?
Taxability on Sectoral Mutual Funds
List of Best Sectoral Mutual Funds in India 2024- H2 table format
Here is a list of the top sectoral mutual funds in India.
Fund Name
AUM (Crores)
CAGR (5-year)
SBI Technology Opportunities Fund
Rs. 3,668.14
21.15%
ICICI Prudential Technology Fund
Rs. 11,977.27
23.41%
ICICI Prudential Infrastructure Fund
Rs. 5,186.46
25.87%
Aditya Birla Sun Life Digital India Fund
Rs. 4,563.00
17.00%
ICICI Prudential Manufacturing Fund
Rs. 3,373.45
22.58%
Bank of India Manufacturing & Infrastructure Fund
Rs. 255.83
25.87%
Kotak Infrastructure & Economic Reform Fund
Rs. 1,608.26
19.54%
Invesco India PSU Equity Fund
Rs. 859
39.15%
Nippon India Banking & Financial Services Fund
Rs. 5,307.29
13.08%
SBI Consumption Opportunities Fund
Rs. 2,026.18
19.15%
Top 10 Sectoral Funds Overview
Now that you understand the meaning of sector funds, let’s take a quick overview of the best sector mutual funds.
How do Sectoral Funds Work?
Every equity mutual fund invests the money it raises from investors in stocks. However, a sectoral fund invests entirely in stocks of firms within the same industry. A sector is a group of related firms that offer the same type of products or services. For example, the technology sector includes businesses that offer technology-related products or services. Similarly, a pharma sectoral fund will invest in firms that offer pharmaceutical-related products or services. The sectoral funds may be quite diversified. For instance, the pharma sector fund does not have to invest just in firms that make medicines. It can invest in various areas, including hospitals and diagnostics.
Features of Sectoral Funds
Here are the key features of sectoral mutual funds.
Sectoral funds differ in market size, investment objectives, and portfolio of securities.
These funds often invest in natural resources, utilities, real estate, finance, health care, technology, communication, and refined metals. Despite this, some sectoral funds specialise in certain subcategories, such as banking.
Sectoral funds exist to expose specialised areas that would otherwise receive little attention from investors.
Furthermore, these funds are regarded for outperforming the market and providing a high reward ratio.
Who Should Invest in Sectoral Funds?
The following types of investors may consider investing in sectoral funds:
Sectoral funds are best suited to active and informed investors who often evaluate the macroeconomic condition of several industries.
Investors prepared to handle large market volatility with a well-designed portfolio can invest in these products.
If you are an experienced investor with a high-risk appetite, sectoral funds may be an option.
Investors with a three to five-year investment horizon might also consider investing in these products.
Factors to Consider Before Investing in Sectoral Mutual Funds
Before you invest in these funds, consider the following tips:
Examine your Investment Goals: H3
These funds are best suited for long-term financial goals like funding children's education, building a retirement portfolio, and so on. Investing in these equity funds may require a 5-—to 10-year time horizon. Investors with a short-term perspective will face much higher risks.
Benefits & Risk of Investing in Sectoral Mutual Funds
Let's highlight the benefits and risks of investing in sectoral mutual funds.
Benefits of Sectoral Mutual Funds
Risks of Sectoral Mutual Funds
Focus on high-growth industries to potentially increase returns.
Vulnerable to significant losses if the selected industry faces a slump.
Capitalise on cyclical patterns by selectively entering a thriving area, such as private top sector mutual funds.
Fund performance is strongly reliant on economic cycles, which can lead to severe fluctuations.
Invest in different firm sizes within an industry to achieve balance.
Lacks diversification across industries and asset classes, limiting protection
Outpace inflation with potentially high returns
Risk of underperformance if the industry does not keep up with inflation.
Align with long-term goals by investing in industries with sustainable growth potential.
May not be appropriate for short-term investing objectives.
Benefit from professional management skills when picking firms within a sector.
Investment performance is dependent on the fund manager's ability to identify good companies.
How to Choose the Best Sectoral Mutual Funds for Investing?
When choosing sectoral mutual funds for your investment portfolio, it is vital to consider the most important factors. Start by properly identifying your financial goals and risk tolerance. Then, research the sectors you are interested in. Examine the fund performance, market conditions, regulatory frameworks, and global trends that impact these sectors. Look for funds managed by competent professionals with a proven track record of managing the complexities of specialised markets.
Diversification remains critical even within sectoral investments. Invest in funds that disperse assets among many firms in the targeted sector to reduce risk. Check expense ratios to verify cost-effectiveness and assess how the fund fits within your investment strategy.
What are the Returns on Sectoral Mutual Funds & How are They Calculated?
Calculating sectoral mutual fund returns is a dynamic procedure that considers the performance of various market sectors. Active portfolio management is critical for maximising investment returns. Fund managers assess the financial health and development potential of firms in their selected industry before making strategic decisions to optimise returns.
Market professionals use a variety of financial indicators to assess sectoral fund performance. The primary metrics evaluated include earnings per share (EPS), price-to-earnings ratio (P/E ratio), and return on equity (ROE). Fund managers adjust their investment strategy to capitalise on emerging possibilities while navigating the risks associated with a specific sector.
Furthermore, total returns from sectoral mutual funds include both capital gains and dividends. Capital gains are the outcome of rising stock prices within the chosen industry. Dividends are a percentage of the fund's profits delivered to investors. This dual method offers a full assessment of the fund's overall performance.
Taxability on Sectoral Mutual Funds
The taxes on sectoral mutual funds are applicable in the following ways.
Found this insightful? Take the next step - Begin Investing
You may invest when the sectoral up-cycle begins for best outcomes in sectoral mutual funds. The goal is to invest at the start of the cycle and be patient.
The lock-in period for sectoral mutual funds varies according to the fund's terms and conditions.
No, sectoral funds do not qualify for such tax benefits. Allocating funds to ELSS schemes allows for tax deductions of up to Rs.1.5 lakh under Section 80C of the Income Tax Act, 1961.
Yes, sectoral funds can assist boost your portfolio's exposure to a specific sector. Investors might use them to hedge their positions. For example, if energy prices unexpectedly rise, other sectors will incur losses, but an energy sector fund will grow.
The cyclical nature of sector funds refers to the change in performance of the funds in different economic, industrial or market phases. Not all industries or sectors perform well at the same time. The cyclical nature of economic sectors causes particular industries to do well in one cycle and poorly in the next.
4 mins read