Welcome to the captivating world of sectoral mutual funds - a thrilling adventure into the heart of specific economic domains! Imagine harnessing the power of a financial compass that steers your investment ship toward a chosen sector's hidden treasures. Sector Mutual Funds, also known as sectoral funds, are enchanting equity schemes that weave their magic by investing solely in a single sector, be it the robust utilities, the dynamic energy, or the ever-evolving infrastructure. 

What are Sectoral Mutual Funds? 

Sectoral mutual funds, also known as sector funds, are equity schemes designed to invest in a specific sector of the economy, such as utilities, energy, or infrastructure. They allow investors to focus their money on businesses within the same industry. SEBI's recent recategorization has clarified the classification of companies as Large Cap, small-cap, or mid-cap, with Large Cap companies being the top 100 in terms of market capitalization.

These open-ended equity funds have a substantial corpus of investment dedicated to a particular sector, enabling them to concentrate on stocks from companies with varying market capitalizations within that sector. By doing so, investors can tap into the best-performing stocks in their chosen sector, potentially maximizing returns. Some common sectors in India include energy, infrastructure, healthcare, and utilities.

Sectoral mutual funds are managed by professional fund managers who have expertise in the sector they are investing in. These fund managers analyze the performance of companies in the sector and select the best stocks to invest in. 

Sectoral mutual funds can be actively managed or passively managed. 

• Actively managed funds are managed by a fund manager who makes investment decisions based on their analysis of the sector. 
• Passively managed funds, on the other hand, track the performance of a specific index, such as the Nifty Bank Index or the Nifty Pharma Index. 

How do Sectoral Mutual Funds Work?

Sectoral mutual funds work like any other mutual fund. Investors pool their money together, and a professional fund manager invests the money in a portfolio of stocks, bonds, or other securities. The difference is that sectoral mutual funds invest only in a specific sector or industry.

For example, if you invest in a banking and financial services fund, the fund manager will invest your money in the stocks of banks and financial services companies. The performance of the fund will depend on the performance of the banking and financial services sector.

It is important to note that sectoral mutual funds are riskier than diversified mutual funds. This is because they are concentrated in a specific sector or industry. If the sector or industry performs poorly, the fund's performance will also suffer. On the other hand, if the sector or industry performs well, the fund's performance will be better than a diversified mutual fund.
 

Types of Sectoral Mutual Funds:

Here are a few high-performing sectors you can invest in:

• Real Estate Funds: Real estate funds are sectoral funds that invest in the real estate sector. They provide investors with exposure to the real estate market without having to buy and manage properties themselves.
• Natural Resources Funds: Natural resources funds are sectoral funds that invest in companies that extract, process, or distribute natural resources such as oil, gas, metals, and minerals.
• Utility Funds: Utility funds are sectoral funds that invest in the stocks of companies that provide essential services such as electricity, water, and gas.
• Financial Funds: Financial funds are pools of money that are invested in a variety of assets, such as stocks, bonds, and real estate. They are managed by professional investment managers who aim to generate returns for their investors.
• Technology Funds: Technology funds are mutual funds that invest in companies that are involved in the technology sector. These funds can be a good way to gain exposure to the growth of the technology industry, but they also carry more risk than other types of funds due to ever-changing trends.
• Healthcare Funds: Healthcare funds are mutual funds that invest in the stocks of companies that provide healthcare products and services. The healthcare sector is a large and growing sector, so healthcare funds can offer the potential for high returns.
• Education Funds: Education sectoral funds typically invest in a variety of companies in the education sector, such as school operators, textbook publishers, and educational technology companies. These funds can be a good way to gain exposure to the growth of the education industry, which is expected to grow significantly in the coming years.
• Communication Funds: Communication sectoral funds are mutual funds that invest in the stocks of companies that operate in the communication sector. This includes companies that provide telecommunications, media, and technology services.
• Precious metal funds: Precious metal sectoral funds are mutual funds that invest in the shares of companies that mine, refine, or trade precious metals such as gold, silver, platinum, and palladium.

Benefits of Investing in Sectoral Mutual Funds 

• Exposure to a specific sector: Sectoral mutual funds provide investors with exposure to a specific sector or industry. This can help investors to capitalize on the growth potential of that sector. 
• Diversification: Although sectoral mutual funds invest in a specific sector, they still provide investors with diversification. This is because the fund invests in multiple companies within the sector, which helps to minimize the risk of investing in a single company. 
• Professional management: Sectoral mutual funds are managed by professional fund managers who have expertise in the sector they are investing in. This can help investors to make informed investment decisions. 
• Potential for higher returns: Sectoral mutual funds have the potential to provide higher returns than diversified mutual funds. This is because they invest in a specific sector that has the potential for growth. 

Risks of Investing in Sectoral Mutual Funds 

1. Concentration risk: Sectoral mutual funds invest in a specific sector, which means that they are exposed to the risks associated with that sector. If the sector performs poorly, the fund's returns will also be affected. 
2. Volatility: Sectoral mutual funds can be more volatile than diversified mutual funds. This is because they invest in a specific sector that can be affected by external factors such as government policies, economic conditions, and global events. 
3. Lack of diversification: Although sectoral mutual funds provide diversification within the sector, they do not provide diversification across sectors. This means that if the sector performs poorly, the fund's returns will also be affected. 

How to Invest in Sectoral Mutual Funds 

Investing in Sectoral mutual funds is easy. It is advised to invest in Sectoral mutual funds through a mutual fund distributor, an online mutual fund platform, or an Asset managing platform. Here are the steps to invest in Sectoral mutual funds:

1. Choose a sector: Choose your choice of sector among various high-performing sectors.
2. Choose a mutual fund: Choose a mutual fund that suits your investment goals and risk appetite in your preferred sectors
3. Complete the KYC process: Complete the KYC process by submitting your PAN card, Aadhaar card, and other relevant documents.
4. Submit the application form: Submit the application form along with the required documents and investment amount.
5. Track your investment: Track your investment through the mutual fund distributor or online mutual fund platform. It is indeed an important step.

Who should invest in Sectoral Mutual Funds?

• Investors with moderate to high risk-appetite. High Risk leading to High Gain.
• Knowledgeable investors willing to follow through on macro trends and make decisions accordingly.
• Investors having the right judgment and information regarding the sectors and their effect on market.

Things to Consider before investing in Sectoral Mutual Funds:

• Investment goals: Sectoral funds are best suited for investors with long-term goals (at least 5 years). This is because the performance of sectoral funds can be volatile in the short term.
• Investment risks: Sectoral funds are concentrated investments, which means they don't offer diversification in your portfolio. This means that your investment is exposed to the risks of the specific sector that the fund invests in.
• Exposure limit: You should limit your exposure in sectoral funds to a maximum of 5-10% of your portfolio. This will help to mitigate the risk of your portfolio being too heavily exposed to the performance of a single sector.
• Expense ratio: You should be aware of the expense ratio of the sectoral fund you are considering investing in. This is the fee that the fund charges to cover its operating expenses. A higher expense ratio can eat into your returns over time.
  
   

Examples of Sectoral Mutual Funds:

• Nippon India Power & Infra Fund:

Nippon India Power & Infra Fund is an open-ended equity fund that invests in the power and infrastructure sectors in India and aims to generate long-term capital appreciation by investing in equity and equity-related instruments. This fund is managed by Mr. Sanjay Doshi with an asset value of ₹ 2,102.14 crores. The fund has annualized return values of 26.04% for 3 years and 12.75% since inception with a very high risk.

• Franklin Build India Fund:

Franklin Build India Fund invests in infrastructure companies across market capitalization, with a focus on structural themes. The recommended investment horizon is of 5 years. This fund is managed by Mr. Ajay Argal, Mr. Kiran Sebastian & Mr. Sandeep Manam with an asset value of ₹ 1,280.50 crores. The fund has annualized return values of 35.37% for 3 years and 15.87% since inception with a very high risk. 

• SBI Magnum COMMA Fund:

SBI Magnum COMMA Fund is an open-ended equity fund that invests in commodity and commodity-related sectors. It seeks to generate growth opportunities and consistent returns by investing in stocks of companies engaged in these businesses. This fund is managed by Mr. Richard D'souza & Mr. Mohit Jain with an asset value of ₹ 443.88 crores. The fund has annualized return values of 26.07% for 3 years and  11.44% since inception with a very high risk. 

• Sundaram Consumption Fund:

Sundaram Consumption Fund is an open-ended equity fund that invests in the consumption sector. It captures wide-ranging industry opportunities presented by rising per capita income. The fund invests in a concentrated portfolio of stocks based on consumption-driven investment ideas. It will majorly invest in the basic industries of the Nifty Consumption Index, without any bias towards a particular market cap or style. This fund is managed by Mr. Ratish B Varier and Mr. Ashish Aggarwal with an asset value of ₹ 1147.1 crores. The fund has annualized return values of 22.7% for 3 years and  11.59% since inception with a very high risk. 

• Mirrae Asset Great Consumer Fund:

Mirae Asset Great Consumer Fund is an open-ended equity fund that invests in companies that benefit from consumption-led demand in India. The fund aims to generate long-term capital appreciation for investors. This fund is managed by Mr. Ankit Jain and Mr. Siddhant Chhabria with an asset value of ₹ 2,385.67 crores. The fund has annualized return values of 27.23% for 3 years and  16.79% since inception with a very high risk. 

Conclusion 

Sectoral mutual funds are a good investment option for investors who want exposure to a specific sector or industry. They provide diversification within the sector and are managed by professional fund managers who have expertise in the sector. However, investors should be aware of the risks associated with sectoral mutual funds, such as concentration risk and volatility. Before investing in sectoral mutual funds, investors should research different mutual funds and compare their performance, expense ratio, and other factors.