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Imagine tapping into the potential of India’s booming IT sector or the robust public sector. With sector funds, also known as sectoral mutual funds, this is not just a dream but an investment strategy adopted by millions.
The funds managed under sectoral/thematic funds have seen a significant increase from the year 2022 to 2024. In October 2022, the AUM was ₹1.68 lakh crore, and by the end of March 2024, the AUM further increased to ₹2.97 lakh crore. This represents a total increase of approximately 77%.
Their popularity has seen a substantial surge. So, what makes sector mutual funds so appealing to the astute investor? Let’s explore the intricacies.
What are sector funds?
Sectoral funds are a distinct category of equity mutual funds that concentrate their investments in businesses from a specific industry. All the funds raised from investors are invested solely in stocks of companies within the same industry.
As an example of sector funds, a power sector mutual fund invests in companies that provide power-related products or services. For example, Nippon India Power & Infra Fund is one such power sector mutual fund. The year-to-date returns of this fund is:
As long as they are part of the same industry, these funds can invest in companies of any size, from large-cap to small-cap.
According to the regulations set by SEBI, a sectoral fund is required to invest at least 80% of its total assets in equity and equity-related instruments of the designated sector.
Sectoral thematic funds
Sectoral thematic funds are a distinctive category of mutual funds that focus on investing in various sectors related to a specific theme. These funds bring together stocks from various sectors, all tied together by a common theme, in contrast to traditional sector funds that typically focus on just one sector.
For example, a thematic fund that concentrates on the concept of renewable energy could allocate its investments to companies in various sectors such as technology, utilities, and manufacturing, which are actively involved in developing innovative solutions for renewable energy.
Here are some of the Sectoral/Thematic mutual funds:
| AUM (₹ crore) | 1 Yr return | YTD return | |
| Quant Infrastructure Fund – Direct Plan-Growth | 2,498.18 | 79.30% | 25.64% |
| Quant Momentum Fund – Direct Plan-Growth | 1,356.67 | (A year has passed not passed since inception) | 23.66% |
| ICICI Prudential PSU Equity Fund – Direct Plan-Growth | 2,405.78 | 85.37% | 21.81% |
| SBI PSU Fund – Direct Plan-Growth | 1,875.84 | 94.94% | 20.45% |
Types of sector funds
Sector Funds are categorised based on the specific industry they target for investment. Some types of sector funds include IT sector mutual funds, Chemical sector mutual funds, Banking sector mutual funds, and many more
As an instance, let’s take a look at a few of the technology sectoral funds:
| 1 Yr Return | Expense ratio | Net assets (₹ crore) | |
| Aditya Birla Sun Life Digital India Fund – Direct Plan | 32.78 | 0.74 | 4,563 |
| Aditya Birla Sun Life Nifty IT ETF | 23.29 | 0.22 | 120 |
| Axis NIFTY IT ETF | 23.37 | 0.22 | 151 |
| Franklin India Technology Fund – Direct Plan | 57.79 | 1.06 | 1,377 |
The following is the one-year return of the Aditya Birla Sun Life Digital India Fund-Direct Plan, a technology sectoral fund. As you can see it is in line with the sectoral indices’s returns.
Advantages of sector funds
- High returns in favourable sectors: When a specific industry does well, investors in sectoral funds stand to gain a lot. Investing in a Sectoral Fund might yield good returns if your techniques and readings indicate that a given sector has great growth possibilities.
- Potential for inflation-beating returns: Sector funds can produce returns that exceed inflation.
- Exposure to specific sectors: Investors can use sector funds to gain exposure to specific sectors of the economy. If an investor is certain about the future of a certain industry, this may work to their advantage.
- Suitable for long-term financial goals: Investors with long-term financial goals may find sector funds to be a favourable investment option.
Risks associated
Investing in Sector Funds, although potentially profitable, does come with its fair share of risks:
- Concentration risk: Given the focus of sector funds on specific sectors, their performance is closely tied to the performance of those sectors. If the sector doesn’t do well, the fund is likely to also not do well.
- Volatility: Investing in sector funds can be riskier compared to broad-based funds due to their focus on specific sectors, which can lead to increased volatility. This makes them more susceptible to sector-specific risks and shifts in the market.
- Regulatory risk: Government regulations can greatly influence a sector, ultimately impacting the performance of sector funds.
- Market risk: The success of sector funds is closely linked to the market conditions of the particular sector in which they invest. If market conditions are not in our favour, the sector fund may experience losses.
- Lack of diversification: Investing all bets on only one sector can lead to a lack of diversification and potentially result in substantial losses if that sector goes through a downturn.
Bottomline
Sector funds provide a distinct investment opportunity, enabling investors to capitalise on the potential of specific sectors.
Although there are inherent risks involved, the potential rewards can be significant if the selected industry performs strongly. Just like a seasoned investor, conducting comprehensive research and gaining a deep understanding are crucial for achieving success.
FAQs
A mutual fund is an investment vehicle that pools money from many investors to invest in a diversified portfolio of stocks, bonds, or other assets. A sector fund, a type of mutual fund, focuses its investments on a specific sector of the economy, such as technology or healthcare. While mutual funds offer broad market exposure, sector funds provide targeted exposure, potentially yielding higher returns but also higher risk.
The choice between buying stocks or mutual funds depends on your investment goals, risk tolerance, and time commitment. Stocks can offer higher potential returns but come with higher risk and require active management. Mutual funds, managed by professionals, offer diversification and are less risky, making them suitable for beginners or those seeking steady growth. It’s important to align your investment choice with your financial objectives.
A Blue Chip Fund is an equity mutual fund that invests in blue-chip companies, which are nationally recognised, well-established, and financially sound. These companies have a larger market capitalisation and a credible track record of financial performance. Blue Chip Funds offer investors the opportunity to benefit from the financial growth of these companies. However, it’s important to note that like all investments, Blue Chip Funds also carry a certain level of risk.
Index Funds are passively managed funds that aim to replicate the performance of a specific market index, like the Nifty 50. They offer broad market exposure and diversification across various sectors. On the other hand, Sector Funds focus on a specific sector or industry, such as healthcare or technology. They aim for high returns through capital appreciation but carry higher risk due to their concentrated nature.
Choosing a sector to invest in involves careful analysis. Start by assessing the economic environment and identifying sectors that are expected to perform well. Look at industry trends and growth prospects. Evaluate the financial health of companies within the sector. Consider your risk tolerance and investment goals. Diversification is key, so consider investing in multiple sectors. Lastly, stay informed about market developments and adjust your investments as needed.