Different types of mutual funds offer an array of investment opportunities catering to diverse financial goals and risk appetites.
In this blog, we delve into what are Sectoral Funds and the advantages & risks of investing in them.
What are Sectoral/ Thematic Funds?
They are a type of equity mutual funds that focus on companies within a particular industry/theme, such as Banking, Pharma, ESG, etc.
As per SEBI categorization, Sectoral Funds must have at least 80% investments in a specific sector.
Banking funds predominantly invest in the banking/financial services space.
Pharma funds invest predominantly in pharmaceuticals and its allied industries.
What are some of the Sectoral Funds available in the markets?
- Business Cycle
- Public Sector Undertaking (PSU)
- Environmental, Social, and Governance (ESG)
What are the advantages of investing in Sectoral Funds?
In the stock markets, all sectors do not work in tandem.
At most times, some sectors are in an up-move while some are in a down-move.
Sectoral Funds can provide higher returns if the sector outperforms the benchmark indices like Nifty or Sensex.
If investors invest in a down-move and catch the upcycle correctly, there is a scope for making higher returns than the broader market.
The Nifty IT index gave a return of 60.36% in 2021, while the index gave a return of -24.68% in 2022.
This underlines the fact that entry and exit into these funds are important in the short term.
What are the risks of investing in Sectoral Funds?
Sectoral Funds carry a concentration risk and are not diversified.
So, if the underlying sector faces a severe drawdown, the sectoral fund can perform poorly in the short term.
Cyclical Nature of these Funds / Timing
In the short term, the timing of cyclical funds is very important, i.e. entry into these funds must be precisely timed.
More important, exit from these funds must also be timed properly.
Who can consider investing in Sectoral Funds?
Investors with a very high-risk appetite and a better understanding of business cycles across sectors may consider investing in these funds by aligning their short and long-term financial goals.