Best Sectoral Mutual Funds to Invest in 2024

  • 10 May 2024
  • Read 16 mins read

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 

Here is a list of the top sectoral mutual funds in India.

Fund NameAUM (Crores)CAGR (5-year)
SBI Technology Opportunities FundRs. 3,668.1421.15%
ICICI Prudential Technology FundRs. 11,977.2723.41%
ICICI Prudential Infrastructure FundRs. 5,186.4625.87%
Aditya Birla Sun Life Digital India FundRs. 4,563.0017.00%
ICICI Prudential Manufacturing FundRs. 3,373.4522.58%
Bank of India Manufacturing & Infrastructure FundRs. 255.8325.87%
Kotak Infrastructure & Economic Reform FundRs. 1,608.2619.54%
Invesco India PSU Equity FundRs. 85939.15%
Nippon India Banking & Financial Services FundRs. 5,307.2913.08%
SBI Consumption Opportunities FundRs. 2,026.1819.15%

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. 

  • SBI Technology Opportunities Fund

    In the previous five years, the direct plan connected with the SBI Technology Opportunities Fund has returned 21.68% annually. Whereas the regular plan has returned 20.31%. This plan follows the S&P BSE Teck Total Return Index.
  • ICICI Prudential Technology Fund

    It is a very popular fund from the reputed financial house of ICICI and one of the top-rated mutual fund schemes in India. Investors may expect a return of 21.33% from the regular plan of this fund scheme. However, the direct plan has yielded an annual return of 22.50% over the previous five years.
  • Aditya Birla Sun Life Digital India Fund

    This scheme fund's regular plan yielded an annual return of 20.44% during the previous five years. Conversely, investors receive a 21.76% annualised return from Aditya Birla Sun Life Digital India Fund's direct plan. It is one of the top mutual funds sectors in India.
  • ICICI Prudential Infrastructure Fund

    This fund began operations on August 31, 2005, and has a ten-year track record. As of February 26, 2024, the AUM is valued at Rs.4574.8 C. It is a medium-sized fund in the category. It has an expense ratio of 1.98 and provides one-year returns of 64.3%. Its CAGR  is also quite impressive at 16.3%.
  • Bank of India Manufacturing & Infra Fund

    Bank of India Manufacturing & Infrastructure Fund-Growth is one of the finest manufacturing mutual funds offered by Bank Of India Mutual Fund. Launched on March 5, 2010, it has 13 years and 10 months of operation, managing Rs.217.8 Cr. With a 2.43 expense ratio, it is a stand out among sectoral infrastructure funds. Notably, the fund offered returns of 57.1% last year and has an 11.8% CAGR. 
  • ICICI Prudential Manufacturing Fund

    ICICI Prudential Manufacturing Fund, a thematic mutual fund launched on October 11, 2018, with a track record of five years and two months. As of February 26, 2024, its AUM is Rs.2708.6 Cr. With an expense ratio of 1.98%, it outperforms the average cost of most thematic funds. ICICI Prudential Manufacturing Fund produced an amazing one-year return of 63.3%.
  • Kotak Infrastructure & Economic Reform Fund

    Kotak Mahindra Mutual Fund's Reform Fund, a sectoral infrastructure mutual fund, has been in existence for 10 years. The fund's AUM is Rs.1477.3 Cr. Notably, the cost ratio is a competitive 2.08%, which is lower than the average for sectoral Infrastructure funds. The fund's Direct plan has delivered around 46.7% returns over the last year.
  • Invesco India PSU Equity Fund

    The Invesco India PSU Equity Fund Direct-Growth, a PSU mutual fund of Invesco Mutual Fund, was founded on November 18, 2009, and has a decade of experience. The fund has Rs.775.1 Cr in assets, making it a medium-sized fund. It has a higher expense ratio than comparable Thematic-PSU funds, at 2.34%. Over the previous year, the fund has provided 90.7% returns.
  • Nippon India Banking & Financial Services Fund

    Nippon India Banking & Financial Services Fund, a sectoral-banking mutual fund managed by Nippon India Mutual Fund, was founded on May 8, 2003. The fund has assets of Rs.5176.8 Cr, making it a medium-sized fund in its category. Its expenditure ratio of 1.92% exceeds the fees imposed by comparable sectoral-banking funds. Over the past year, the fund has offered returns of 33.4%.
  • SBI Consumption Opportunities Fund

    SBI Mutual Fund launched SBI Consumer Opportunities Fund Direct on January 2, 2013. The fund's assets under management are around Rs.2000.7 Crores. It has a competitive 2.1% expense ratio. The return from funds is 34.40%, with a CAGR of 16.4% over the last year.
 

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. 

  1. Sectoral funds differ in market size, investment objectives, and portfolio of securities.
  2. 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.
  3. Sectoral funds exist to expose specialised areas that would otherwise receive little attention from investors.
  4. 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: 

  1. Sectoral funds are best suited to active and informed investors who often evaluate the macroeconomic condition of several industries.
  2. Investors prepared to handle large market volatility with a well-designed portfolio can invest in these products.
  3. If you are an experienced investor with a high-risk appetite, sectoral funds may be an option.
  4. 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:

  1. 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. 

  • Risk Appetite:

    Sectoral funds have a high risk appetite since they invest all their funds in one sector only. These mutual fund schemes have a high level of risk, so investors should be prepared. 
  • Limit your Exposure:

    Investors should consider diversifying their portfolio with other mutual funds before investing in sector funds. Investors should be aware of the high risk associated with these schemes. 
  • Limit your Exposure:

    Investors should consider diversifying their portfolio with additional mutual funds before investing in these funds. Because the risks are significant, limit your exposure to these funds.

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 FundsRisks 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 returnsRisk 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.

  • Long-Term Capital Gains

    Long-term capital gains (LTCG) apply to investors who hold units in a sector fund for at least a year. Such gains of up to Rs. 1 lakh are tax-free within a fiscal year. Returns beyond this range are subject to a 10% tax. There are no indexation benefits in this case.
  • Short-Term Capital Gains

    Short-term capital gains are the returns created when an investor holds units in a sector's fund for less than a year. In such circumstances, a 15% tax rate is payable.

Conclusion
A sectoral mutual fund is an equity strategy that invests in the shares of firms operating in a certain industry. Investors seeking high-risk options may prefer sectoral funds. These funds focus on a single industry, and their insufficient diversification places them among the riskiest mutual funds. Therefore, only individuals comfortable with high risk may consider investing in them. As a result, before investing in any sectoral fund, conduct extensive industry research. You can find all the details regarding a fund on a good stock market app. A sectoral fund can be a good option for a well-diversified portfolio. 

FAQs on Sectoral Mutual Funds

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.