Sector Mutual Fund: Meaning, Types and Advantages

Did you know that 130 sectoral and thematic funds have delivered returns of up to 81.49% in just the past year? Sector mutual funds can offer the potential for much higher returns than traditional investments, if you know how to use them wisely.

Read this blog to know what a sector mutual fund is, its types, key features, and the kind of investors it suits best. 

Quick Synopsis

• At least 80% of a sectoral fund’s assets are allocated to stocks from that particular sector.
• Taxation of sectoral mutual funds ranges between 12.5% (for LTCG) and 20% (for STCG).
• Recommended investment horizon is 5 to 10 years.

Sector Mutual Funds Meaning

Sector mutual funds, also known as sectoral funds, are sector-specific equity mutual funds that focus on a specific industry of the economy. The industries include manufacturing, pharma, real estate, energy, finance and other sectors.

These funds invest at least 80% of their assets in stocks from that sector, and aim to provide high returns to their investors when the sector performs well. However, investing in sectoral mutual funds carries a higher risk, since investments are concentrated in just one particular industry.

Key Features of a Sector Fund 

• Concentration

Like other mutual funds, sector funds do not invest in diverse industries. While this focus increases the potential for higher returns, it also limits portfolio diversification. 

• High Returns

Sector funds can yield higher returns if that particular industry performs well, making them a good choice for investors with high-risk-taking capacity.

• Variable Performance

Predicting returns of sectoral funds can be difficult. It is based on several factors, including economic situations, the latest industry trends, and stock market cycles.  

• Increased Risk:

As sectoral funds primarily invest in a specific industry, they carry higher risk if that sector underperforms. So, returns can become highly unpredictable.

Different Types of Sector Mutual Funds 

• Pharma Funds

Invest in companies that deal with pharmaceutical and healthcare products.

• Energy Sector Mutual Funds

Invest in sectors like oil, gas, mining, metal, and renewable energy.

• Consumer Goods Funds

Target businesses that produce food, beverages, personal care products and household items.

• Banking and Financial Services Funds

Target banks, NBFCs, businesses that deal with real estate, insurance companies and financial intermediaries.

• Technology or IT Sector Mutual Funds

Focus on businesses that provide IT services, software development, telecom and internet services. 

How Does a Sector Mutual Fund Work?  

Sectoral funds invest their money in stocks of entities that fall under the same sector or industry. For instance, mutual fund pharma sector invests their money in pharmaceutical companies and natural resources funds only focus on companies that deal with energy, oil, natural gas, timber, etc. 

Here, you must understand that the pharma sectoral fund will not only invest in entities that manufacture medicine. They also considered laboratory chains, biotechnology firms, hospitals, and companies that are involved in extensive research related to the healthcare industry. 

Moreover, they invest in enterprises of different sizes, from large-cap to small-cap. There is only one rule that they should belong to the same sector. 

Who Should Invest in a Sector Mutual Fund? 

• High-risk tolerance capacity and want to generate higher returns.
• Vast knowledge about one specific sector. 
• Are active and experienced, having a substantial understanding of market trends, the right timing and having an interest in conducting thorough research on sector-related news. 

Taxation of Sector Mutual Funds

• Long-term Capital Gains (LTCG): 

Investors who hold units of sectoral funds for more than 12 months incur long-term capital gains, taxed at a rate of 12.5%.

• Short-term Capital Gains (LTCG): 

Investors who hold units of sectoral funds for less than 12 months incur short-term capital gains, taxed at a rate of 20%.

Factors to Consider Before Investing in Sectoral Mutual Funds 

• Investment Goals

If you have long-term financial goals, then consider investing in sectoral mutual funds. This sector expects an investment horizon of 5 to 10 years to yield higher returns.

• Risk Tolerance

These funds concentrate their investments within a specific industry or sector; they are riskier than other mutual fund schemes. Be prepared for the inherent risk before investing.

• Portfolio Diversification

It is important to invest in other mutual funds in addition to sector funds. Maintaining a diverse portfolio helps you better deal with the risks associated with it. 

• Expenses Consideration

Some expenses come with sectoral mutual funds, such as expense ratios charged by AMCs, sales and annual charges. So, evaluate the costs, then make an informed decision. 

These are some factors that need to be considered before investing in a sector mutual fund to achieve your long-term financial goals. You have three easy ways to invest: through asset management companies, mobile applications, and branches of the issuing company. 

Book an FD via the Stable Money platform. You can avail up to 8.40% interest annually. 

Try it today!