What Is a Sector Fund?

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All about Sector Mutual Funds and how they work

Key Takeaways

• Sector Funds or Sectoral Funds invest in one particular sector of the economy.
• Investors can invest in industries or sectors like healthcare, real estate, natural resources, etc.
• Sectoral Funds come with concentration, liquidity, and volatility risks.
• Sector Funds invest 80% of the total assets in equities, per SEBI mandates.
• Investors can earn greater returns when Sector Funds are held for longer durations.

As an investor, you may always be looking for ways to diversify your portfolio. To this end, you may invest in several securities across various asset classes. An excellent way to diversify your portfolio is to invest in specific sectors such as natural resources, healthcare, and real estate. Such investments are known as Sector Funds. Keep reading to learn more about Sector Mutual Funds.

Sector Fund – Meaning

A Sector Fund is an Equity Fund that invests in a particular industry or sector. These Mutual Funds invest in utilities, real estate, healthcare, communication and other prominent sectors in an economy. Also known as Sectoral Funds, these funds may further invest in stocks of top-performing companies in a specific sector.

How do Sector Funds Work?

Like Equity Funds, Sectoral Funds, too, invest in equities of several different companies. The only point of difference is that various companies may belong to the same sector. Some days, the banking sector may outperform the technology sector, while pharma stocks may be bullish on other days. With Sector Funds, investors can invest their entire money in one specific sector and capitalise on growth opportunities. However, as per SEBI mandate, fund managers must invest at least 80% of the total assets in equity and equity-related instruments of a given sector.

Benefits of Investing in Sector Funds

Returns

When a sector is performing well, the companies that fall under it also grow. By investing in the specific Sectoral Funds, you stand to earn good returns.

Diversification

Sector Mutual Funds empower you to diversify your investment portfolio. You can invest in funds from various sectors or buy stocks of different companies from the same sector.

Hedging

Well-performing Sector Mutual Funds allow you to hedge your portfolio. E.g., if oil prices rise, all other sectors that demand oil may experience a downfall. Consequently, you can invest in corresponding natural resources Sector Funds to hedge your investment portfolio.

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Things to Consider

Risks

Besides concentration risk, Sector Funds are subject to volatility and liquidity risks. As such, if a sector performs well, you can expect greater returns, and if it declines, the returns may decrease. To reduce potential losses, fund managers may have to sell securities at a loss.

Investment Horizon

Like any other investment in any other industry, a sector will require time to grow and produce favourable results. Hence you should opt for Sector Funds if you can stay invested for five or more years.

Taxation

Short-term capital gains (STCG) on Sector Funds held for less than a year are taxed at 15%. Tax on funds held for more than one year is known as long-term capital gains (LTCG). LTCG on gains up to INR 1 lakh is tax-free, whereas the tax on gains exceeding INR 1 lakh is 10%.

Conclusion

Now that you know what is sector Fund, you can invest, create a diversified portfolio and earn high returns. Consult your investment advisor or visit DBS Bank to invest in the best-performing sector funds and make informed investment decisions.

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*Disclaimer: This article is for information only. We recommend you get in touch with your income tax advisor or CA for expert advice.