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Sector Funds: What are sector Funds?

Created on 15 Jun 2019

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Updated on 16 Oct 2020

These are equity mutual funds that give you access to a very small part of the overall market; they majorly invest in a particular type of business, industry or a sector of the economy. It can be any sector such as the Education sector, Automobile sector, Health care sector, IT sector, FMCG sector, etc.

For Instance:

If there is an Automobile sector fund then it can invest only in companies such as Tata Motors, Mahindra & Mahindra, Toyota, Bajaj Auto, Maruti Suzuki, Chevrolet or any other company of these kinds.

Sector funds are more narrow terms of thematic funds, which are also a kind of mutual funds that invest the money across the sectors of a particular theme. They are considered to be more diversified than sector funds. For example, if a fund is built on a construction theme then it can only invest in cement companies, bricks companies, paint companies, etc.

These funds are somewhat similar to Exchange Traded Fund except that shares in an ETF can be bought and sold throughout the day like a stock on a stock exchange through a broker-dealer

These funds focus on a particular type of business, industry or a sector of the economy and so their performance in the market is wholly based on the performance of that particular sector. If the sector performs well in the market it can help investors generate huge returns and vice versa. It is therefore considered to be one of the riskiest types of funds available under the equity scheme.

As the market links high risk with high return thus creating a Risk-Return trade-off these funds are preferred by investors who have a high-risk appetite. Also, these funds are considered to be highly cyclical in nature and investors should be very particular about the timings of entry and exit the market so as to earn maximum profits. These types of funds are generally preferred by aggressive investors who want maximum returns but also can survive huge losses and maybe because of this reason a lot of people don’t prefer to invest in these kinds of volatile funds.

Furthermore as the market is highly fluctuating in nature there is no guarantee of returns under this platform so it is always needed by investor to study the overall market properly and select those outperforming sectors which have great potential of future growth in coming years and then invest the money into them and if someone is a professional in the market and has created good portfolio strategy than investing through this route can help them earn maximum returns.

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Koushik Mohan has completed MBA from National institute of securities markets (SEBI), with 1.6years of experience working with Northern Trust and CA firm in the departments like OTC derivatives and Accounting.

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