A sectoral mutual fund, as the name suggests, is an equity fund wherein the fund is invested in businesses belonging to the same industry. Such investments let investors expose their capital to a particular sector by investing in funds from the same industry.
These kinds of funds are popular among mass investors and those who believe that a particular sector has immense growth potential in the near future.
If you are unaware of what sector mutual funds are and how they function, we are here to help! This article discusses sector funds to help you decide whether they are right for you.
The Indian market is divided into multiple sectors: pharmaceutical, manufacturing, banking, technology, etc. Besides, there are several niche sectors.
Some of these sectors have been around for a long time. They have consistently delivered high returns, making them good investments. Sectoral funds are built with the intent to help investors capitalise on returns from such industries.
The primary difference between regular equity and sectoral funds is that the capital is invested in multiple stocks across different industries in the former. On the other hand, in sectoral funds, the money is invested in multiple stocks from the same sector.
A sector is a collection of businesses that belong to the same industry and more or less function similarly. Two companies from the same sector produce the same output or service. For instance, Wipro belongs to the tech industry, as does Infosys.
Sectoral funds work on the principle of high risk, high returns. These funds invest in a particular sector. While it is never wise to put all your eggs in the same basket, sometimes it might work to your advantage.
You should invest in sectoral funds only if you can afford to take risks, as sectoral funds lack diversification. All your money is invested in a single sector, jeopardizing your entire capital. If the sector hits an unexpected low, all your money will go down the drain. In sectoral funds, your money is highly dependent on the performance of the sector you invest in.
Owing to the risks involved, you must venture into sectoral funds only if you are a seasoned investor. If you have actively invested for several years, you will clearly understand the market. This aspect will help you determine which sector will most likely do well in the near future.
Picking the right sector to invest in is crucial regarding sectoral funds, and seeking expert advice is highly recommended.
The post-tax returns you seek from an investment determine the performance of an investment. Paying a large amount in taxes on your returns makes the investment pointless. Sectoral funds are taxed based on the duration of the investment.
Short-term capital gain tax (STCG) applies to investments withdrawn within a year. The STCG for short-term investments is 15%.
Long-term capital gain tax (LTCG) is levied when the investment duration is more than a year. On gains less than 1 lakh, the return is non-taxable; beyond that, it attracts a tax rate of 10%.
Sector funds are usually high-risk, high returns funds. It is always risky to put your eggs in the same basket. However, if the basket has the potential to perform, then the results may surpass expectations.
Sectoral funds are risky. But if you are an experienced investor with market knowledge, investing 5-10% of your funds in them is a safe move.
There is always the potential for high returns with sectoral mutual funds. If the industry you’ve invested in sees sudden growth, your money will double in no time. For instance, the Pharma industry saw a 27% growth during the Covid-19 pandemic. Investors who invested in the pharma industry before Covid would have received huge returns.
High risk is a real possibility with sector funds. Since these funds discourage diversification, there’s a fair chance that the sector you invest in faces a backlash and you lose your money. For instance, if an investor invested in the hospitality industry before the Covid era, he’d have lost all his money since the hospitality industry faced significant setbacks due to the lockdown.