The Sector Fund is a kind of mutual fund that invests in a particular sector or industry of the economy. Simply, the sector-specific mutual funds such as banking funds, FMCG funds, etc. are called as sector funds. The principal objective of sector funds is to give the investors an opportunity to earn huge returns from the particular industry sectors which have high growth potential.
In these type of funds diversification is only in that particular sector and not in the entire market. As a result of this the returns in these funds depend on the performance of that sector in particular. While these funds may give higher returns than diversified equity funds but the risk in these funds is also on the higher side, if the performance of that sector goes down because of any reasons like political, economical, social, technological, legal etc these funds are hit the worst vis-a-vis the overall stock markets. Due to less diversification they are more volatile and riskier than the other market funds.
Things to consider while investing in sector specific funds.
Don't invest more than 10 % of your portfolio.
Pick up sectors which are at their low and there is sufficient reason to believe an uptick is in sight.
Have a clear investment strategy as to why you want to invest in that sector and stick to it.
You may have to wait for a long if the sector goes into a deep slump. So, walk out if you have earned substantially well,
Some of the commonly used sector-specific funds are:
Banking funds: Here, the portfolio is mainly comprised of equities of different banks.
Real-Estate Funds: The sector specific mutual fund that concentrates its investment in the real-estate companies.
Pharma Funds: The portfolio containing the investments in the pharmaceutical companies.
Technology Funds: The mutual fund that invests in the IT companies.
FMCG Funds: Here the investments are made in the fast-moving consumer goods companies.
Thus, the sector funds are suitable for those investors who have an aggressive risk appetite. Often, the investors choose these funds when they expect the certain industrial sector to outperform the overall market. While some invest in sector funds with the intent to hedge or protect against the other holdings in the portfolio.