Sector Funds is one of the types of equity funds.Mutual funds are of different types, and they are widely classified as an equity fund, debt fund, and hybrid funds or balanced funds. The most popular category of mutual funds is the equity fund and is also considered as the best investment option by many investors. The equity funds comprise of various groups like;
- Thematic and Sector funds,
- Diversified equity funds,
- Index fund,
- Funds based on the market capitalization and so on.
When financial planning is considered, equity mutual funds are known as the best investment plan.
Sector funds- Meaning
Equity funds that invest in companies belonging to a specific sector are known as Sector funds. For example, an oil and gas fund would invest in the shares of an oil and gas company; a pharma fund would invest in the shares of a pharmaceutical company and so on.
There are many types of sector funds,few of the are given below:
- Real estate,
- Natural resources sector funds and so on.
Features of sector funds:
- Sector funds are concentrated on a single sector of the market and have limited diversification.
- Getting high returns through these funds is a viable option if the sectors show a robust growth over time.
- It can also function as a hedge against the market fluctuations especially when the sectors grow inversely proportional to the economy.
- The performance of these sector funds varies according to the economic cycle based on multiple factors.
- A sector fund is well suited for aggressive investors and for those who are willing to take additional risks.
How to invest sector funds?
When investing in sector funds, the investor should pay attention to the competence of the fund manager while ensuring that there is a sizable corpus under management. While it is ideal that sector funds do not exceed 10% of the investor’s portfolio, the suggested allocation will vary from investor to investor based on their risk appetite and financial goals. As every sector goes through different economic cycles, the investor has to time the market; an experienced financial advisor can make this move.
How to choose the best sector fund?
An investor can choose by using these pointers as guidelines:
Performance of the sector:
The market’ movement is defined by cycles, and the sectors will show different rates of growth at different times. So, while investing in this, it is prudent to look how the sector is performing as a whole by looking at the history of the companies and the past performances of the sector. This helps in the understanding of trends, and the investor can calculate how frequently the market shrinks or expands.
Apart from assessing the past performance, it is also vital to evaluate the growth potential and the profitability factor of this. It is essential to know the bigger picture of where the sector is headed and the economic forecast when investing in sector funds.
The investor has to look out for diversification feature in the sector funds. So before investing in sector funds, the investor has to look for the gaps in their portfolio and choose a sector fund which fills the gap.
The investor can seek professional advice from a Wealthapp financial advisor before investing in sector funds.
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