What are Sectoral Funds & How to Invest?

1. Concentrated

From the definition of a sectoral mutual fund, one can clearly understand that these fund types focus on one sector of the market. Thus, there is no chance for diversification. To be precise, sectoral funds primarily depend on the performance of the chosen sector.

2. Research-Intensive

Since investment in sectoral funds occurs in a single sector, fund managers need to conduct extensive research to identify the trends of that specific sector. Fund managers can predict the growth and performance of a sectoral fund only after such practice.

3. Term

Sectoral funds can have small, medium, to long term. Usually, fund managers do not prefer small-term investments. On the other hand, long-term sectoral fund investment allows a particular sector to grow and churn out maximum benefits over a long period of time.

4. Hedge against Inflation

Sectoral funds can function as a hedge against inflation, given that the chosen sector operates in a way that is inversely proportional to the economy.

5. Investment Across Market Capitalisation

By investing in sectoral funds, investors can get exposure to a diversified portfolio where they can invest in equities of companies (belonging to a particular sector) across market capitalization.

1. Investment Goals

Investors must always be sure of their investment goals and make a decision accordingly. If investors have an investment horizon of a long time, then they can find sectoral funds an ideal option. Wondering why? Any sector needs substantial time to grow, and so does the sectoral fund to generate profitable income.

2. Risk

To ensure guaranteed and profitable returns, investors must evaluate the risk factor of sectoral funds. Sectoral funds are confined within one sector. If that particular sector suffers from adverse market conditions, it can expose investors to high risks and potential loss.

3. Exposure Limit

As sectoral funds possess high risk, they must not give much weight to this fund in their portfolio.

4. Expense Ratio

The expense ratio is an annual charge that Asset Management Companies (AMC) charge from investors for managing sectoral funds. Hence, investors must consider this factor before investing.

5. Taxation

Sectoral funds are taxed as equity mutual funds. Subsequently, they have short-term and Long-Term Capital Gains tax. (LTCG tax) If investors sell the investment before 1 year, they will be classified as Short-Term Capital Gains (STCG tax) and have to pay a 15% tax on these funds.

On the other hand, if investors hold a sectoral fund for less than 1 year, it will be classified as Long-Term Capital Gains (LTCG) tax.

Remember, if investors gain up to ₹ 1 lakh, they do not have to pay any tax. For gains of more than ₹ 1 lakh, investors have to pay a 10% tax on them.