Sector funds in 2022: Sector Mutual Funds Meaning, Returns & Benefits
While investing in mutual funds, an investor has a choice to invest in diversified funds, sector funds, or thematic funds. As the name suggests, a diversified fund gives exposure to companies from diverse sectors. A sector fund gives exposure to companies from a particular sector. A thematic fund gives exposure to companies that are a part of a theme that may involve multiple sectors. This blog focuses on sector funds: meaning, returns, and benefits.
What is a sector fund?
As per SEBI guidelines, sector mutual funds are open-ended mutual funds that invest a minimum of 80% of their total assets in equity and equity-related instruments of a particular sector. For example,
- An IT sector fund has to invest a minimum of 80% of its total assets in equity and equity-related instruments of IT companies.
- Similarly, a healthcare sector fund has to invest a minimum of 80% of its total assets in equity and equity-related instruments of healthcare companies.
Now that we understand sector funds meaning let us see how they work.
How does a sector fund work?
Initially, a sector fund raises money through a new fund offering (NFO). During the NFO, the fund announces the scheme objectives, which sector they will be investing in, the rationale behind it, the investment philosophy, the fund manager, etc.
People can invest in the NFO either with a lumpsum or a systematic investment plan (SIP). The money raised through the NFO is invested in the specific sector companies as per the scheme objective. The investors are allotted the scheme units in proportion to their investment. The scheme’s net asset value (NAV) depends on the valuation of the underlying securities held by the scheme. The fund house announces the scheme NAV at the end of every business day. An investor’s profit or loss will depend on the difference between the current NAV and the price at which they bought the units.
Who should invest in sector funds?
If you are planning on investing in sector funds, you need to sector you need to understand the risk profile. Sector funds are focused on a particular sector as 80%, or more of their funds are invested in companies belonging to a specific sector. So, there is a very high concentration. It is the opposite of diversification, as suggested by most investment advisors. As an investor, if you have an aggressive risk profile and are willing to bet on a specific sector, you may consider investing in a sector fund.
Taxation of sector funds
From a taxation point of view, any mutual fund scheme with a minimum of 65% of its total assets in equity and equity-related instruments is classified as an equity scheme. Sector funds are treated as equity funds and taxed accordingly.
Short-term capital gains (STCG) tax: If you sell your sector mutual fund units within twelve months of purchase, the capital gain will be classified as short-term capital gain (STCG). The short-term capital gain (STCG) tax will be levied at 15%.
- Long-term capital gains (LTCG) tax: If you sell your sector mutual fund units after twelve months of purchase, 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 taxation. The incremental long-term capital gain above Rs. 1 lakh will be taxed at 10%.
Benefits of sector fund investment
As discussed earlier, a sector fund investment is a concentrated bet on a specific sector. If the sector does well, the fund can create good wealth for you. For example, during the Covid 19 pandemic, the demand for digital services zoomed as people were shopping from home, working from home, and availing of all services from home. As the IT companies were providing the digital services, their shares prices did well. During this time, the IT sector funds were one of the best performers.
Similarly, after the Government eased the Covid restrictions and sectors were opened up, one after the other, the prices of most commodities went up sharply due to the increased demand for goods and services. During this time, commodity sector funds gave good returns to investors.
Returns from sector funds
(Direct Plan - Growth Option)
|Tata Digital India Fund||5,158||47.69%||37.70%||33.59%|
|ICICI Prudential Technology Fund||8,184||48.87%||40.15%||32.72%|
|Aditya Birla Sun Life Digital India Fund||3,036||41.68%||37.64%||31.86%|
|SBI Technology Opportunities Fund||2,355||44.97%||34.30%||28.51%|
|Franklin India Technology Fund||722||17.80%||27.77%||23.78%|
The above table shows that IT sector funds have performed well and given the best returns in the last five years among all sector funds. The top five funds have given a 23% to 33% CAGR return, a good return.
Risks associated with sector funds
We have already discussed earlier that sector funds invest a minimum of 80% of their total assets in equity and equity-related instruments of companies belonging to a specific sector. If that particular sector is going through a downturn, it affects the investors’ returns.
For example, during the 2008-09 subprime crisis, the infrastructure companies were one of the hardest hit. As a result, infrastructure funds underperformed for the next couple of years compared to the broader market and other sector funds.
Similarly, during demonetisation, the financial sector went through a difficult time. During this time, banking sector funds and finance sector funds underperformed compared to the broader market and other sector funds.
Sector funds are suitable for investors with an aggressive risk profile. When the underlying sector is doing well, they have the potential to give inflation-beating high returns and generate excellent returns for the investors. Investors who don’t have an appetite for very high risk may consider investing in diversified equity funds such as large, mid, small, or multi-cap mutual funds.
How to invest in sector funds?
You can invest in sector funds through the Glide Invest App. If you have already shortlisted a specific sector fund for investment, you can read about it on the App and proceed with your investment. If you haven’t shortlisted any specific fund, you can go through the listed sector funds and read about them, and choose an appropriate one for investment.
The Glide Invest App will recommend the investment based on your risk profile, financial goals, investment time horizon, etc. You can partner with the Glide Invest App for your financial planning journey to get recommendations for the appropriate mutual fund schemes based on your risk profile. You will get advice on planning and systematically investing towards your financial goals.
With Glide Invest, you will get guidance for:
- A personalised risk profile assessment
- Identifying your financial goals
- Appropriate asset allocation
- Making a financial plan for each goal
- Automating the financial plan
- Review and analysis of your financial plan
- Hand holding you till your financial goals are achieved