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Mumbai: While looking at mutual fund investment options, you might think that it is an easier bet to just pick a well performing sector that has delivered double-digit returns. According to data by Value Research, the technology sector delivered an average returns of 19.55% in the last year. However, one year returns may not be enough to place your bets in funds which take a highly concentrated approach towards their portfolio. Are sector funds a one-size fits all category? And how different are they from thematic funds? Here we decode it for you.
What are sector funds
A sector fund is a mutual fund scheme that invests most of its corpus in equities of one particular sector. “Sector funds invest in securities of specific sectors such as information technology, banking and pharma sector as specified in the investment objective of the fund," said Gautam Kalia, head–investment solutions, Sharekhan, an online broking platform.
All sector funds are, therefore, equity oriented. “A sector fund invests at least 80% into equity and equity-related instruments of a particular sector," said Joseph Thomas, head research, Emkay Wealth Management. There are a total of 54 sector funds in the market among which five were launched last year, according to Value Research. Out of the 40 asset management companies (AMCs) in the industry, 25 offer such funds.
“They are different from general mutual fund schemes that have their portfolio diversified across different sectors of the economy," said Aashish Somaiyaa, CEO, Motilal Oswal AMC. For example, ICICI Prudential Technology Fund invests only in shares of technology-oriented companies such as Infosys Ltd, Tech Mahindra Ltd and Oracle Financial Services Software Ltd.
Sector funds are not very different from diversified equity funds, when it comes to the cost of investing in them. “They might be slightly expensive because the funds are narrower and have smaller economies of scale," said Ankur Choudhary, co-founder and chief investment officer, Goalwise.com, a mutual fund investment platform. “Sector funds are likely to be expensive by anywhere between 0.25% and 0.5% annualised," said Somaiyaa.
The performance of sector funds is cyclical in nature and dependent on the individual sector’s performance. “The infrastructure sector did well in 2017, with average returns of more than 50% while the returns in 2018 were around 20 to 25%," said Choudhary. Similarly, banking stocks did well in 2017 but rising non-performing assets (NPAs) and reported scams didn’t help the sector in 2018. “The IT sector on the other hand has been doing well for a couple of years because of the depreciating rupee," Somaiyaa said.
Should you look at it?
It is only natural that a well-performing sector will find decent exposure in the portfolio of diversified equity funds. “So when you choose to invest in a sector fund, it is undoubtedly a case of ‘overweighting’ exposure to that sector," said Somaiyaa. After decoding the fund’s portfolio and risk profile, you can ascertain that these funds are of high risk value.
“However you need to be aware of the sector-specific risks associated with the fund. You must also keep in mind the cyclical nature of sectors where the returns could be impacted by the market cycle, such as infrastructure funds sectors," said Kalia.
Since they depend only on one sector, their volatility is higher. “Unless you know how to pick the right sector, you should avoid such funds," said Choudhary. But is it that easy to pick the right sector? “Only institutional investors or high net worth individuals who can afford their own equity research team that can do the proper analysis for them are advised to invest in sector funds," said Choudhary. Along with longer investment horizon, sector funds require expert advice.