Invest in Top Sector Mutual Funds In 2022: High Return Mutual Funds In India
The National Stock Exchange (NSE) offers two types of indices: Broad market capitalisation indices and sectoral indices. The broad market capitalisation indices give exposure to diversified companies from various sectors. The inclusion of the company in a broad market capitalisation index is based on the company's market capitalisation. On the other hand, sectoral indices give exposure to companies from a specified sector. This article focuses on how to invest in top sector mutual funds in 2022.
What are sectoral mutual funds?
A sectoral mutual fund invests in shares of companies belonging to a specific sector. As per SEBI guidelines, a sectoral fund is an open-ended equity scheme that has to invest a minimum of 80% of its total assets in equity and equity-related instruments of specific sector companies.
Some of the sectoral indices offered by the NSE include:
- Nifty Auto Index which includes companies like Maruti, Tata Motors, Hero, Bajaj, TVS, etc.
- Nifty Bank Index which includes banks such as HDFC Bank, SBI, ICICI Bank, Kotak Bank, etc.
- Nifty FMCG Index which includes companies such as Hindustan Unilever (HUL), Godrej Consumer, Marico, ITC, etc.
- Nifty IT Index which includes companies such as TCS, Infosys, HCL Technologies, Wipro, etc.
Fund houses offer various sectoral mutual fund schemes with the above indices as the benchmark. By investing in a sectoral mutual fund such as a technology mutual fund, an investor gets exposure to various IT companies that are a part of that sectoral index.
Returns by few sectoral mutual funds
Let us look at the returns given by some of the sectoral mutual funds.
Note: The returns are as of 23rd Feb 2022.
Who should invest in sectoral mutual funds?
Investors willing to allocate a small part of their investment portfolio to sectoral funds such as a banking fund, technology fund, etc., may consider investing in sectoral mutual funds. But, please note that investing in a sectoral mutual fund will lead to sectoral concentration in your investment portfolio, which is the opposite of diversification, which most investment advisors recommend. So, if you are an aggressive investor with a high-risk appetite, you may invest some amount in a sectoral mutual fund scheme.
Taxation of sectoral mutual funds
For taxation purposes, sectoral mutual fund schemes are treated as equity schemes and taxed accordingly.
Short-term capital gains (STCG) tax:
- If you sell your sectoral mutual fund scheme units within 1 year of purchase, the capital gain will be classified as short-term capital gain (STCG). The STCG tax will be levied at 15%.
Long-term capital gains (LTCG) tax:
- If you sell your sectoral mutual fund scheme units after 1 year of buying, the capital gain will be classified as long-term capital gain (LTCG). Every financial year, the first Rs. 1 lakh long-term capital gain will be exempt from tax. The incremental LTCG above Rs. 1 lakh will be taxed at 10%.
Risks involved in sectoral mutual fund schemes
Sectoral mutual fund investors are exposed to equity risk and sector concentration risk within equity. All equity mutual funds, including sectoral mutual funds, are subject to market risks. Whenever there is an adverse event like recession, war, pandemic, political instability, inflation, etc., the entire market undergoes a correction. During such events, shares of companies belonging to specific sectors also sell-off along with the broader equity market. It leads to a fall in the NAVs of sectoral mutual funds.
Sectoral funds on a standalone basis are also vulnerable to a sell-off. For example, during 2020-21, shares of banks saw a fall due to a rise in NPAs due to Covid related lockdowns, job losses, business closures, etc. During this time, the NAVs of banking mutual funds saw a fall. Similarly, during the 2000 Dotcom bubble burst, shares of technology companies fell, leading to a fall in NAVs of technology mutual funds. During the 2008 Subprime crisis, shares of infrastructure companies fell, leading to a fall in NAVs of infrastructure mutual funds.
Return potential of sectoral funds
In 2021, technology mutual funds were among the best performers as the demand for digital services increased. The table in the above section shows how four of the top five sectoral mutual funds are technology mutual funds. They have given returns in the range of 27-32% CAGR in the last five years. These are good returns for investors of technology funds.
Similarly, banks saw excellent credit growth during the 2003-07 period and reported good profit growth. During this period, the banking mutual funds did very well and gave excellent returns to their investors.
During the same period (2003-07), the Central Government, State Governments, and private companies made a lot of capital expenditure, creating new capacities. Infrastructure companies were sitting on huge order books and reporting excellent sales and profits. As a result, infrastructure mutual funds gave good returns to their investors.
Advantages of sectoral mutual funds
The biggest advantage of a sectoral mutual fund is that it gives you an opportunity to participate in the growth story of that specific sector and the listed companies operating in that sector. As the companies in that specific sector execute existing orders and new orders, their revenues and profits will continue to grow at a healthy pace. It will boost the share prices of listed companies in that sector and the net asset value (NAV) of sectoral mutual funds.
If you invest in a good sectoral mutual fund, it has the potential to give you inflation-beating high returns and thus create wealth for you.
Reasons to invest in sectoral mutual fund schemes
Some of the reasons for investing in sectoral mutual funds schemes include:
- It gives you a minimum of 80% exposure to the specific sector. If the specific sector is doing well currently and has the potential to continue to do well in the foreseeable future, the sectoral mutual fund has the potential to create long term wealth
- Favourable tax treatment of an equity mutual fund scheme
Asset allocation: Diversification is the key
A sectoral mutual fund will give you exposure to only companies belonging to that specific sector and hence has concentration risk. As per the asset allocation strategy, you should diversify within and outside equity asset class. Within equities, your investment portfolio should have exposure to diversified companies in various sectors. You can do that by investing in diversified large, mid, and small-cap mutual fund schemes. Outside equities, you should diversify into debt, real estate, gold, etc