Sector Mutual Funds: Who Should Invest In And Why?
Mutual funds have become one of the most popular ways of investing in recent times. The number of investors is continuously increasing. This is because investors get higher returns by putting their funds in equities. However, mutual funds are not all about equity-related instruments. There are many funds that invest in different asset classes like equity, debt, real estate, gold etc. Mutual funds provide ways to diversify investment portfolios. Diversification is advised as it opens up investment windows and thus gives higher returns than any other traditional form of investment. Moreover, it reduces the risk of investors while participating in equities.
Investing directly in the stock market is risky, but at the same time it gives good returns. People are afraid of losing their money by investing directly in the stock market because they lack expertise. But mutual funds have made it easier to invest money in the stock market and also reduce the risk. Funds, in turn, offer better returns than other investment instruments, especially when an investor remains invested for a long period of time.
Experts emphasize on diversifying the portfolio by investing in different sectors of the economy. There are various mutual funds that allow investors to invest in specific sectors of the economy. This type of fund is called sector mutual fund. Sector funds are equity schemes where Asset Management Companies (AMCs) invest in a specific sector. These sectors can be utilities, energy, infrastructure, technology, banking, resources, communications, health care and more.
Sectoral mutual funds allow investors to participate in the best performing stocks in a specified sector. The AMC consists of experts who have experience in managing these funds.
According to Harish Krishnan, EVP and Fund Manager Equity, Kotak Mahindra Asset Management, sectoral funds have a pre-determined universe that usually covers a key sector or a few sectors. Within this pre-defined universe, the fund manager selects businesses based on an assessment of the risk-reward and long-term attractiveness of these businesses.
Harish said if an investor’s portfolio lacks exposure to a particular sector, sector funds can be an option to invest in this sector in a diversified manner.
“Generally, these are best suited for investors who already own diversified funds in their core allocation, and want opportunistic investments in the sector. They also appeal to institutional investors/family offices who want to invest in the sector. want focused exposure to a particular sector, and instead identify individual businesses within the sector itself, rather than a basket of companies in the sector,” Harish said.
Sector Mutual Funds: Risk Factors
As per SEBI norms, sector funds have to invest at least 80 per cent of their assets in their mandated sector. Therefore, their fund managers cannot exit mandated areas, even if they are convinced of its prolonged poor performance due to business cycles, government regulations or other factors.
“Since a sectoral fund is launched for a specific sector, concentrated investments lead to increased risk. These investments make sense when a certain sector is considered on a growth path for the next few years only. Investors who have already built diversified portfolios and sectors willing to take on the fund’s volatility should invest in such funds, said Karan Dutta, former Chief Business Officer, Axis Mutual Fund.
Sector Mutual Funds: Redemption Timings Critical
Sahil Arora, Senior Director, Paisabazaar.com said that sector funds can seize an opportunity and hence, timing of exit is crucial. He said the returns generated by sector funds mainly depend on the performance of the sector concerned, in which it is imperative to invest these funds.
“This leads to higher exposure for sector funds as compared to sector agnostic diversified equity funds,” Sahil said.
He suggested that investors should opt for sector funds only if they can closely track the trends of the essential sector and time their investments and redemptions accordingly.
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