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All about Sector Mutual Funds and how they work
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.
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.
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.
Sectoral and thematic mutual funds are included in the mutual fund equities segment as per SEBI. These mutual funds have the obligation to invest at least 80% of the assets in equity and equity-investment instruments of a particular sector or theme. The main forms of sectoral mutual funds are:
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.
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.
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.
Sectoral and thematic funds are considered riskier compared to diversified equity funds due to their niche investment mandate.
While investing in sector mutual funds, it is always necessary to understand the risk, investment tenure, and taxation, as these mutual funds behave very differently from other equity mutual funds.
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.
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.
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%.
Sector funds are best suited for investors who are comfortable taking concentrated exposure to specific industries and understand the risks associated with sector-based investing.
Investing in sector funds can be done in a few simple steps:
Now that you know what is sector Fund, you can invest, create a diversified portfolio and earn high returns. While these funds offer opportunities for targeted gains, it is important to consider the associated risks, maintain a long-term perspective, and use them as a tactical addition to a balanced portfolio. Careful planning and regular monitoring can help maximise benefits while managing volatility effectively.
To manage your investments efficiently, consider opening a Savings Account with DBS Bank and access smart digital banking tools for seamless financial planning.
*Disclaimer: This article is for information only. We recommend you get in touch with your income tax advisor or CA for expert advice.
Sector funds invest primarily in a single industry or sector, such as IT, banking, or healthcare. Diversified funds spread investments across multiple sectors to reduce risk. Sector funds can offer higher returns when their sector performs well but are more volatile than diversified funds.
Yes, sector funds carry higher risk because their performance depends on a single sector. Market cycles, regulatory changes, and sector-specific events can cause sharp fluctuations in returns. They are suitable for investors with a high risk appetite and a long-term horizon.
Short-term capital gains (STCG) on sector funds held for less than one year are taxed at 15%. Long-term capital gains (LTCG) on holdings over one year are tax-free up to INR 1 lakh, with gains above this threshold taxed at 10%.
