What is a Sectoral Fund? What are it’s Advantages & Disadvantages.
In general equity mutual funds are classified either by market capital or by sector. In this blog post we shall walk you through the sectoral mutual funds.
What is a Sectoral Mutual Fund?
A sectoral fund is a fund that invests only in companies of a particular sector. For example a Pharma fund will invest only in pharmaceutical companies, banking and finance fund will invest in companies that are in banking/finance sector.
What are the various major categories of Sectoral Funds in India?
The below table provides the major categories of sectoral funds and their returns (Average returns from each category).
Advantages of Sectoral Funds
- Potentially high returns if chosen correctly.
- These funds hold stocks across all market cap within that sector
- With sectoral funds one could also diversify his portfolio by allocating % for each sector and buying sectoral funds accordingly across various sectors.
Disadvantages of Sectoral Funds
- Higher volatility than diversified equity
- A wrong sector can heavily dent the portfolio returns.
- Need more knowledge on markets and macroeconomic situation.
Sectoral funds are funds that are really meant for active educated investors who often analyses the macroeconomic situation of sectors. The Prime reason for investing in sector funds is to beat the market returns as they have high risk-reward ratio. So when an educated investor feels that this sector would be the future for next couple of years then buying sectoral funds would help them in beating the diversified fund returns. For example when dollar rates are high this would aid IT industry as this would help to boost their overall margin through forex gains. If their view fails it could adversely dent the portfolio. Hence sectoral funds should not be used as main part of portfolio. Hence if you are new to equity mutual fund investing these funds may not be your cup of tea.
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