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You may invest in mutual funds, depending on your investment objectives and risk tolerance. You can spread your investment across various sectors and industries to reduce risk in equity mutual funds called diversification. However, you will have to invest in sector funds if you want higher returns than equity-diversified mutual funds.
Sector funds are a type of equity mutual fund that invests in stocks of companies in one sector. It puts money in businesses that belong to the same sector or industry. You may put money in sector funds if you prefer buying stocks of companies in only one industry.
For instance, a pharma sector fund invests in shares of pharmaceutical companies across market capitalisation. You can invest in sector funds such as infrastructure, oil and gas, pharmaceuticals, information technology, automobiles and so on.
Sector funds are risky as compared to equity-diversified mutual funds as they put money in only one sector. The fund manager invests at least 80% of the fund’s total assets in a single sector’s equity and equity-related instruments. Moreover, the fund manager can invest in stocks of companies across market capitalisation in that particular sector.
You may invest in equity mutual funds only if you are a long-term investor with a time horizon of five years or more. However, sector funds are an exception to this rule as they are suitable only for well-informed and savvy investors.
You may invest in sector funds only if you can time the entry and exit of your investment. You must do your research and have a thorough understanding of the sector you plan to invest your money.
You will have to take a call on when to put money in the sector fund. You will have to invest in the sector fund when the relevant businesses are at the bottom of the cycle and exit the investment when it reaches its peak to maximise your return.
For example, you may invest in auto sector funds when automobile businesses are at the bottom of the cycle. You will have to wait until the peak of the cycle to exit your investment.
You may consider putting money in equity funds for the long run to achieve your long-term financial goals. However, you may invest in sector funds only if you can time the market. For example, banking stocks do well when interest rates are expected to fall.
You will find a rise in interest rates in the economy, affecting the performance of banking stocks. You can invest in the banking sector funds only if you understand the interest rate cycle and the economic cycle. You will have to time the entry and exit of your investment in banking sector funds to maximise your return.
You may avoid sector funds if you are a beginner in the stock market. You can invest in equity-diversified funds that spread your investment across different sectors. It protects your investment against underperformance in one sector. However, investing in sector funds is risky and requires a thorough understanding of that particular sector.C
You can invest in sector funds as part of your satellite portfolio. It helps enhance the overall return of the portfolio. Investing in sector funds involves tactical moves where you must know the best time to enter and exit the investment to maximise your return.
Do not invest in sector funds with a buy-and-hold strategy for the long run. You can consider this investment if you are an aggressive investor who understands the business cycle and has sound knowledge of the relevant sector. You must also have the ability to make tactical moves in the stock market to maximise your profits.