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Sectoral Mutual Funds | 5 Best Sector Funds for 2022

  • Rudri Rawell
  • Jan 15 2022
  • 7 minutes
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What are Sectoral funds?

A sector fund is a mutual fund that invests in businesses operating in a specific sector such as FMCG, pharma, energy, information technology (IT), banking, etc. Since the investment portfolio is concentrated in a particular sector of the economy, these mutual funds offer low diversification and may involve comparatively higher risk levels.

The three broad features of Sectoral funds are:

  1. Research-oriented

The investment strategy adopted by sectoral funds is based on detailed research. This involves researching the sector-specific peaks across different timelines to identify the right sector to invest. Hence, investors should preferably have basic industry know-how to make the most of these fund investments. 

  1. Higher risk

Since sectoral funds are concentrated in a specific sector, these can be riskier as the fund performance will depend on the sector performance and dynamics.

  1. Different market capitalisations 

While sectoral funds focus on a specific sector, the investment may be diversified across different market capitalisations. Thus, a single fund may invest across large-caps, mid-caps and small-caps as identified by the fund manager.

Reasons to invest in Sectoral funds

Investors who are looking to diversify their portfolio can explore sectoral funds, as these offer a specific sector exposure based on a strategic construct. 

  1. These offer a good opportunity for investors who do not have the know-how or risk-taking ability to invest in individual stocks of a specific sector that may be in the growth phase.
  2. Sectoral fund investments can also be used as a portfolio hedging strategy. For instance, if fuel costs are on the rise, many other dependent industries may slow down as the fuel sector grows. Thus, investors can park their funds in a sectoral fund that invests in the fuel sector to hedge their portfolio.
  3. As an example of the benefits to be availed from sectoral funds, the Covid-19 pandemic has resulted in a boost to the pharma sector. Thus, investing in a sectoral fund focused on pharma can fetch potentially good returns to investors. Similarly, there can be other sectors in the growth phase which can be tapped to earn better returns.

Who can invest in Sectoral funds?

The below-mentioned points can help investors gauge if sectoral fund investments are suited for them:

  1. Investors with high-risk appetite: Since these funds invest in specific sectors, the low diversification can result in higher-risk levels. Therefore, these funds are ideal for investors who have a high-risk appetite.
  2. Investors with basic sectoral knowledge: Sectoral funds may not suit first time or new investors. This is because sectoral fund investments require monitoring of entry and exit timings. Experienced investors may be able to conduct rigorous research around the sector and may, therefore, find it convenient to study these funds before investing. Investors should keep themselves updated with the latest news and headlines to decide on which sector is worth investing in. 
  3. Investors looking to construct a strategic portfolio: Some sectors may be cyclical in nature, such as the construction sector. Thus, investors who are looking to strategically place their investments may consider investing in a sector that is currently at the bottom of its cycle and stay invested until it reaches the higher growth levels. 

Based on historical performance, here are the top fund options to invest in ultra short duration funds:

  1. Mirae Asset Great Consumer Fund
  2. Invesco India Infrastructure Fund
  3. Tata Banking & Financial Services Fund
  4. ICICI Prudential Pharma Healthcare and Diagnostics (P.H.D) Fund
  5. Aditya Birla Sun Life Digital India Fund

Mirae Asset Great Consumer Fund

About Fund

The scheme aims to generate long-term capital growth through investment focus on equity of companies that are dependent directly or indirectly on the consumer sector in India. 

Inception DateJanuary 01, 2013
Benchmark NameNIFTY India Consumption Total Return Index
Fund ManagerAnkit JainSiddhant Chhabria
Expense ratio0.54%
Fund typeOpen-ended
RiskVery high

Historical Returns of the Fund (annualised)

1-Year2-Year3-Year5-Year10-Year
34.96%23.89%20.12%21.71%18.51%

Invesco India Infrastructure Fund

About Fund

The investment objective of the fund is to offer long-term capital growth by investing in a portfolio primarily consisting of equity and equity related instruments belonging to different infrastructure companies. 

Inception DateJanuary 01, 2013
Benchmark NameS&P BSE India Infrastructure Total Return Index
Fund ManagerAmit NigamNeelesh Dhamnaskar
Expense ratio1.44%
Fund typeOpen-ended
RiskHigh

Historical Returns of the Fund (annualised)

1-Year2-Year3-Year5-Year10-Year
57.49%35.88%26.90%20.75%18.77%

Tata Banking & Financial Services Fund

About Fund

The scheme aims to offer long-term capital appreciation through an investment focus of 80% corpus in equity/equity related instruments of companies belonging to the Banking and Financial Services sector in the country.

Inception DateDecember 28, 2015
Benchmark NameNIFTY Financial Services Total Return Index
Fund ManagerAmey Sathe
Expense ratio0.87%
Fund typeOpen-ended
RiskVery high

Historical Returns of the Fund (annualised)

1-Year2-Year3-Year5-Year10-Year
15.86%9.97%16.12%18.04%18.57%

ICICI Prudential Pharma Healthcare and Diagnostics (P.H.D) Fund

About Fund

The scheme aims to fetch long-term capital growth by setting up and maintaining a portfolio of investments comprising equity and equity related securities. Only securities belonging to wellness, pharma, hospitals, diagnostics, healthcare and allied set-ups, are considered for investment.

Inception DateJuly 13, 2018
Benchmark NameS&P BSE Healthcare Total Return Index
Fund ManagerDharmesh Kakkad
Expense ratio1.05%
Fund typeOpen-ended
RiskHigh

Historical Returns of the Fund (annualised)

1-Year2-Year3-Year10-Year
18.28%42.90%30.08%25.15%

Aditya Birla Sun Life Digital India Fund

About Fund

The fund aims to offer capital growth and regular income by focusing investment in technology and allied companies. The scheme follows a bottom-up approach for stock selection and adopts a combination of value and growth investing styles.

Inception DateJanuary 01 2013
Benchmark NameS&P BSE Teck Total Return Index
Fund ManagerKunal Sangoi
Expense ratio0.88%
Fund typeOpen-ended
RiskHigh

Historical Returns of the Fund (annualised)

1-Year2-Year3-Year5-Year10-Year
72.53%65.73%46.00%34.78%27.46%

Taxation on returns from Sectoral funds

The capital gains generated from sale of sectoral fund investment are taxable as per the holding period of investment. Here are the details:

  1. Short Term Capital Gain Tax (STCG): If a sectoral fund investment is sold within 1 year, the gains come under Short Term Capital Gain (STCG) and a tax of 15% is applied to such gains.
  2. Long Term Capital Gain Tax (LTCG): Any gains from sectoral fund investment held for more than one year are classified as Long Term Capital Gain (LTCG). Thus, 
    1. Gains in a financial year within Rs. 1 lakh are tax free. 
    2. Gains in a financial year beyond Rs. 1 lakh are taxed at 10%.

Conclusion

Sectoral funds are relatively riskier than other categories of equity funds. Since these funds focus their exposure within a sector, there is a higher concentration risk. The performance of these funds will therefore be aligned with the investment sector performance. Therefore, investors must first gather some understanding of the sector before including these funds as part of their investment portfolio.

FAQs

What should an investor know before investing in sectoral funds?

Some of the factors that an investor can consider before investing in sectoral funds include investment horizon, risk-taking ability compared to the fund’s risk level, expense ratio of the specific fund, and overall weightage in an investment portfolio.

How to invest in sectoral funds?

To invest in sectoral funds, an investor can download the Finity app, which offers a range of mutual fund products. It allows easy access to a wide variety of fund options based on risk levels, time horizon, and investment preferences.

Which is better, sectoral or thematic funds?

Sectoral funds concentrate their investment within selected sectors whereas thematic funds may invest across sectors while following a certain theme for investment, such as infrastructure, power, etc.

Are sectoral funds only equity-based?

Yes, sectoral funds are equity-based since they invest in equities of companies that belong to the chosen sector.

What are the different sectors covered by sectoral funds?

Some of the commonly chosen sectors under sectoral funds are technology, healthcare, real estate, finance, metals, communications, etc.

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