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A sectoral fund is an equity fund that invests the money of investors in businesses belonging to the same industry or sector. These funds let investors take exposure in specific sectors of the economy by putting all their money in companies of the same sector.
As of late, SEBI's recategorization has modified the foundation to determine whether an organization is Large Cap, small-cap, or mid-cap. Large Cap organizations are those that constitute the top 100 companies in terms of market capitalization.
The Indian economy consists of different sectors such as technology, banking, pharma, natural resources, and more. Some of these sectors might perform outstandingly well in the medium to long term. Sectoral funds are an avenue that is built with the aim to help investors capitalize on such opportunities.
Every equity mutual fund invests money mobilized from the investors in stocks of companies. The only difference with a sectoral fund is that it invests its entire money in stocks of companies that are in the same sector.
A sector, basically, consists of similar businesses that provide, more or less, the same type of product or services. For instance, take the Technology Sector. It consists of companies like Infosys, Wipro, Tech Mahindra, Microsoft, etc. So a sectoral fund that is aimed towards investing in the Technology Sector will have a portfolio of businesses belonging to the technology sector. Similarly, a Pharma Sectoral Fund will invest in companies like Cipla, Biocon, and GlaxoSmithKline Pharma. Here, it is not necessary that the Pharma sectoral fund will invest in companies that only manufacture medicine. It has a host of other options that it can invest in like hospitals, diagnostics, etc.
Further, sectoral funds invest in companies of all sizes from large-cap to mid-cap to small-cap; but the only mandate is that they should belong to the same sector. Also, according to SEBI, all fund managers of sectoral funds need to invest 80% of the fund's total assets in equity and equity-related instruments of a particular sector.
All sectors don't move in tandem with the economy. Sectors are cyclical in nature. They have some good ones as well as some bad ones. So, based on your research and analysis, if you can catch the right cycle, you have a chance of earning exceptional returns by investing in sectoral funds. For instance, many investors earned exceptional returns of over 27% on their investment in Pharma Sectoral Funds during the outset of the Covid disease. Thus, only if the sector you believe in hits the spot, your portfolio returns are going to be good, probably it could be higher than a well-diversified fund too.
As mentioned above, these funds invest in a specific sector and this lack of diversification means these are one of the riskiest mutual funds available. So only those investors who are comfortable with taking high risk should consider investing in them.
If you're a first-time investor, you should not jump into sector funds right away. Investment in sector funds needs timing one's entry and exit right, which is something that even experienced investors struggle with. It needs rigorous research about the sector. Active investors who are constantly abreast of the news and headlines can take a better call on whether which sector is going to perform well. Even investors who are closely related to the sector (by work), will have access to insights that can help them make the most out of their investment in sectoral funds.
There are some sectors that are considered to be cyclical sectors like the auto sector. So, investors who can have a high-risk appetite of taking exposure in businesses that are at the bottom of their cycle can make a great deal by investing in sectoral funds. A shrewd investor can invest in a sector which is at the bottom of their cycle, and patiently wait till the time it reaches its peak. Once it reaches its peak, they can immediately sell it to book profits. Thus, it requires a knack and some amount of patience to invest in sectoral funds.
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.
|Fund Name||3-Year Return (%)*||5-Year Return(%)|
|Tata Digital India Fund Direct-Growth||30.32%||29.41%||Invest|
|ICICI Prudential Technology Direct Plan-Growth||32.31%||28.64%||Invest|
|Aditya Birla Sun Life Digital India Fund Direct-Growth||30.60%||27.63%||Invest|
|SBI Technology Opportunities Fund Direct-Growth||27.28%||26.21%||Invest|
|Franklin India Technology Fund Direct -Growth||23.10%||20.25%||Invest|
*Last updated as on 12th Sep 2022
*It must be noted that these are not fund recommendations. Besides, they are also not the only way through which you can rank funds.
It is quite easy to invest in Sectoral Funds on ET Money. All you need to do is just follow these below-mentioned steps:
Provide basic details like Pan & Bank Details & you are all set.