Given the number of investment instruments available today, choosing the right one can be a task, with each offering unique benefits to investors. Mutual Funds are a popular instrument among a vast section of the society, but are often misunderstood or ignored, with people choosing to invest without truly learning about them. Given the growth and development across the globe, certain sectors have cropped up as being “the ones” which ensure that an investment in them is assured of great returns, with sector mutual funds aiming to offer returns by investing in these sectors.
What are Sector Funds?
A Sector Fund, as the name implies, is a fund which primarily invests in a single sector/industry, concentrating on entities which operate under the ambit of this particular sector. With the economy being a mix of multiple segments today, a sector fund helps investors narrow down the spectrum, offering investment solutions based on particular requirements. For example, one can choose to invest primarily in the aviation sector, choosing to capitalise on the growth of that particular sector.
The primary motive of investing in sector funds is to cash in on a growing sector, aiming to offer good returns while a boom is witnessed.
Popular sectors for investment
India has become a hub for industries since the economic revolution in the 90’s, with a number of major financial conglomerates setting up businesses in the country. Some of the popular sectors opted by fund managers and mutual fund companies are listed below.
- Aviation – The aviation industry has witnessed a major change in the last few years, with the number of flyers in the country steadily increasing. Investing in this sector could help one’s financial dreams take wings.
- Telecommunication – The telecommunication sector is perhaps the most sought after one today, with companies vying to outdo each other. Increased penetration among the residents has resulted in these companies making huge profits.
- Real Estate/Development – Investing in funds which concentrate on real estate could offer good returns, especially if these investments are made in major companies.
- Natural Resources (oil, gold, etc.) – Dwindling natural resources have resulted in an exponential increase in rates, with a few fund managers investing in natural resource companies.
- Technology – The IT boom has changed the way the world sees India, with every major technology firm looking to set up base here. This sector is perhaps the one most funds would look at.
- Healthcare and nutrition – India’s healthcare system attracts patients from across the globe, and certain funds invest in the healthcare industry to cash in on this boom.
- Pharmaceuticals – Similar to the healthcare sector, the pharmaceutical sector is highly sought after, primarily due to technology innovations.
Features of Sector Funds
Some of the unique features of Sector Funds are highlighted below.
- Concentrated – Sector Funds concentrate on a single segment of the market, allowing no room for diversification, and relying solely on the performance of that particular sector.
- Term - Investments in sector funds are typically medium to long term, with short term investments not preferred by most mutual fund managers. A longer term provides sufficient time for the sector to grow and reach its optimal level.
- Expensive – Investing in sector funds can be an expensive proposition, with most of these coming at a premium price.
- Time specific – Investing in a sector fund should be time specific, for the rewards associated with a particular market segment might diminish once they peak. It is imperative to study the market and do comprehensive research about the trends of a particular sector to get the most out of it.
- Risky – Investing in a sector fund can be riskier, with these mutual funds considered high risk propositions. This risk factor is due to the lack of diversification, and reliability on a single industry.
- Research intensive – Sector funds are extremely research intensive, with fund managers aiming to predict their growth over a certain period of time.
- High returns – It is possible to get high returns through investing in sector funds, primarily if these sectors witness stable growth over a period of time.
- Hedge – A sector fund can work as a hedge against inflation, primarily if the sector functions in a manner which is inversely proportional to the economy.
- Variation – The performance of sector funds varies according to the economic cycle, with differential performance expected based on multiple factors.
- Aggressive investors – A sector fund is ideal for investors who are aggressive and do not mind taking additional risks to invest in a volatile market.
Who should invest in Sector Funds?
Investment in sector funds is a matter of choice, with it suited for people who do not mind taking risks. Typically, individuals who are aware of a sector and its performance history would be the best suited to this form of investment, as they are aware of the risks involved and could predict the returns they can expect. Given the cost associated with them, investors with additional funds can opt for them.
It is not advisable for people looking for steady, limited returns, primarily due to the high risk associated with these investments.
Popular Sector Funds in India
The popularity of Sector Funds in India is limited to a few segments, with the popular funds listed below.
- UTI Transportation and Logistics Fund
- Reliance Pharma Fund
- ICICI Prudential Technology Fund
- Franklin Build India Fund
- Reliance Banking Fund
- Invesco India Infrastructure Fund
- ICICI Prudential Banking and Fin Serv Fund
- ICICI Prudential Infrastructure Fund
- SBI Infrastructure Fund
- Tata Infrastructure Fund
Mutual Fund investments will be subject to market risks. Any mutual fund listed in the document does not guarantee fund performance or its underlying creditworthiness. Do read the mutual fund document thoroughly before investing. Specific investment needs and other factors have to be taken into account while designing a mutual fund portfolio.
GST rate of 18% applicable for all financial services effective July 1, 2017.