Sector mutual funds are stock schemes that invest in specific economic sectors. These can be utilities, energy, etc. These funds allow individuals to invest in the most profitable stocks in a particular industry of their choice.
The performance of industries is more volatile compared to other investments. As most of the industries mainly outperform limit the use of such funds, and this type of fund with good profit margins is becoming a more important mutual fund.
Why are investors choosing sectorial over other?
Since the outbreak of the Covid-19 coronavirus at the beginning of last year, the stock market has fallen drastically by about 40% due to concerns about the economic impact. However, after large-scale announcements of fiscal and monetary policy measures around the world, people are optimistic about the discovery of a vaccine against the virus.
Harshad Chetan Wala, the co-founder of MyWealthGrowth.com, said that due to the market adjustments in 2020 and the pandemic and isolation, some industries have performed well in the past year, helping some industries to improve their performance. “Many investors are looking for short-term results and want to add some of these funds to their portfolios. Today, we can still see strong investor interest in industrial funds., the banking industry and consumer protection continue to attract investors Attention,” he said.
Things to be considered:
investing, investors need to consider certain factors. Industry funds are much riskier because they depend on the performance of related industries which may outperform or underperform at any time. Compared with funds, the performance of such funds is volatile. When the industry collapses, fund managers cannot protect themselves from losses by exiting the industry instead they need to face huge losses. So, it is very much instructed that the investors should be able to handle the losses.
Hemen Kapadia says investors should ideally limit exposure to such funds to less than 5-10% of their portfolio. “Before entering such funds, you have to be ready to face the losses and should be in a position to handle the wealth in an optimum way also should be ready to face market volatility. You must be nimbler with sector funds and sometimes take calls to exit regardless of whether your opinion has developed that “The sector has generally outperformed the market and valuations appear too high or have changed.” Investors should aim with one thing invest and sector/theme should be part of the portfolio based on risk appetite.