Sectoral Mutual Funds

Sectoral Mutual Funds

Sectoral Mutual Funds are investment funds concentrating on a specific sector or industry, allowing investors to focus on that sector’s performance. They offer the potential for higher returns but come with higher risk due to their concentrated nature. 

Content :

What Is A Sector Fund?

A sectoral mutual fund is a type of mutual fund that focuses its investments primarily on a specific sector or industry of the economy, such as technology, healthcare, energy, or financial services. 

These funds are designed to expose investors to a particular sector’s performance. They aim to benefit from the growth potential of that sector, but they can also be riskier than diversified funds because they are more concentrated in one market area.

Examples Of Sector Funds

Sector funds focus on specific industries like technology or healthcare, investing in companies such as Infosys, TCS, Sun Pharma, or Dr. Reddy’s, allowing targeted investment in growth sectors.

How do Sectoral Funds Work?

Sectoral funds work by focusing the investments exclusively on a specific sector or industry, such as technology, healthcare, or energy.  The objective is to capitalize on the growth potential of that sector, and the fund’s performance is closely tied to the overall performance of the companies within that sector.

This process begins with selecting a particular sector based on economic analysis, market trends, and personal interests. After this, a careful selection of individual stocks or securities within that sector is done by considering factors such as the financial health of these companies, growth prospects, and market positions.

Despite a high concentration on a single sector, sectoral funds aim for some diversification. This helps spread the risk and reduces the fund’s dependency on the performance of a few individual companies. Additionally, sectoral funds are often actively monitored to respond to evolving market conditions.

The overall performance of the sectoral fund reflects the collective performance of the stocks held within it. As a result, if the chosen sector performs well, the value of the sectoral fund typically increases and vice versa. It’s crucial to recognize that sectoral funds come with specific risks due to their focused nature.

The share price of the fund is determined by its net asset value (NAV), which can fluctuate as the sector’s performance evolves. Sectoral funds are most suitable for investors who possess a strong conviction about the growth potential of a particular sector and are comfortable with the associated risks.

Types Of Sector Mutual Funds

Some common types of Sector Mutual Funds include:

  1. Equity Sector Funds
  2. Sector Exchange-Traded Funds (ETFs)
  3. Sector Bond Funds
  4. Sector Bond Funds
  5. Communications Sector Funds
  6. Real Estate Investment Trust (REIT) Funds
  7. Natural Resources Sector Funds
  1. Equity Sector Funds: These funds primarily invest in stocks of companies within a particular sector. For example, a technology equity sector fund will concentrate on technology-related stocks.
  2. Sector Exchange-Traded Funds (ETFs): Like sector mutual funds, sector ETFs also focus on specific sectors or industries. However, they trade on stock exchanges like individual stocks, providing intraday liquidity.
  3. Sector Bond Funds: These funds focus on bonds issued by companies within a specific sector or industry. For instance, a utility sector bond fund would primarily invest in bonds issued by utility companies.
  4. Global Sector Funds: These funds invest in companies from a specific sector globally. They may include both domestic and international companies within the chosen sector.
  5. Communications Sector Funds: These primarily invest in companies within telecommunications, media, and entertainment.
  6. Real Estate Investment Trust (REIT) Funds: These funds primarily invest in real estate investment trusts, which are companies that own, operate, or finance income-producing real estate properties. 
  7. Natural Resources Sector Funds: These funds focus on companies involved in natural resource industries, including mining, forestry, and agriculture. 

Sector Funds Risk

Sector Funds carry high risks due to their focus on a single industry, leading to a lack of diversification. Their returns are significantly impacted by the sector’s performance, necessitating portfolio diversification.

Best sector mutual funds

Here are some top-performing specific sector mutual funds:

NameAsset Under Management (AUM)3-Year Returns
ICICI Prudential Infrastructure Fund Direct Plan IDCW Payout₹3,229.80 Crores44.16%
ICICI Prudential India Opportunities Fund Direct Plan Cumulative Option₹12,279.46 Crore40.27%
Quant Infrastructure Fund IDCW Direct Plan Payout₹980.30 Crores40.04%
HDFC Infrastructure Fund Growth Direct Plan₹919.34 Crores42.45%

Thematic Funds Vs Sector Funds

The main difference between thematic and sector funds is that Thematic funds invest in various companies related to a common theme or trend, while sector funds concentrate on a specific industry or sector and lack diversification.

AspectsThematic FundsSector Funds
FlexibilityThemes can change over time to adapt to emerging trends.Sector remains constant, with limited theme flexibility.
Risk and VolatilityModerate risk due to diversification, but may be sensitive to theme success.Potentially higher risk due to sector concentration. 
Return PotentialPotential for capitalizing on emerging trends or themes.Potential for higher returns when the chosen sector performs well.
Investment ObjectiveSuited for investors interested in specific themes or trends.Suited for investors with strong convictions about a particular sector’s growth potential.
ExampleClean energy, technology, or ESG (Environmental, Social, and Governance) thematic funds.Technology, healthcare, or energy sector funds.

Do you want to expand your knowledge about mutual funds? We’ve got a list of must-read blogs that will help you do just that. Just click on the articles to find out more.

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What Is A Sector Fund – Quick Summary

  • Sectoral Mutual Funds are investment funds solely focused on a specific sector or industry. It allows investors to focus on that sector’s performance, which results in higher returns but also comes with higher risk due to their concentrated nature. 
  • Sectoral mutual funds primarily invest in a specific sector, such as technology, healthcare, or energy.
  • Examples of sectoral funds include technology sector funds and healthcare sector funds.
  • Sectoral funds work by selecting a particular sector, choosing individual stocks or securities within that sector, and actively managing the portfolio.
  • Different sector mutual funds include equity sector funds, sector ETFs, sector bond funds, global sector funds, and more.
  • Sector funds have specific risks, including sector concentration, economic cycles, and industry-specific factors.
  • The difference between thematic and sector funds is that thematic funds focus on themes or trends, while sector funds concentrate on specific sectors.
  • Start building your portfolio with Alice Blue today. Alice Blue offers diverse Investments, including Sectoral Mutual Funds, stocks, and IPOs, without additional charges.

Sectoral Mutual Funds – FAQs  

1. What is a sectoral mutual fund?

A sectoral mutual fund is an investment fund that concentrates on a specific sector or industry of the economy, such as technology, healthcare, or energy, allowing investors to focus on the performance of that sector.

2. Which is the best sectoral mutual fund?

The top performing sectoral mutual funds are ICICI Prudential Infrastructure Fund Direct Plan IDCW Payout and ICICI Prudential India Opportunities Fund Direct Plan Cumulative Option.

3. Is it safe to invest in sectoral mutual funds?

Investing in sectoral mutual funds carries higher risk due to their concentrated focus on a specific sector or industry. These funds can experience greater volatility and potential losses hence, it’s important to maintain a diversified portfolio to manage the risk.

4. What is the minimum investment for a sectoral fund?

The minimum investment required for a sectoral mutual fund can vary among different fund companies and funds. It typically starts from as low as Rs. 5,000.

5. Why invest in a sector fund?

Investing in a sector fund allows you to target specific sectors or industries you believe will outperform, potentially offering higher returns if your sector predictions are correct.

6. What are the benefits of sector funds?

The benefits of sector funds include the potential for higher returns if the chosen sector performs well, targeted exposure to specific industries, and the ability to align your investments with market views.

To gain a better understanding of the topic and access more information , explore the articles below that cover mutual funds, stock market insights, trading strategies, and organizational perspectives.

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