Assess your risk profile carefully before investing in sector funds

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What is meant by sector funds? What are the features, advantages and disadvantages of sector funds? A mutual fund investor must know the answers of these questions as these funds look to gain the most from positive cues of the sector. By definition, sector funds are the type of mutual funds or Exchange Traded Funds (ETFs) that invest in specific sectors like Telecommunications, Information Technology, Banking, Automobile, Pharmaceuticals, etc.

As the motive behind investing in such mutual funds is to leverage the positive trends of the sector, you better know the same to let your investments grow as well as remain safe. You have to be meticulous while picking the best sector funds for you. We will help you choose the best funds in accordance with your investment objective.

How to pick best sector funds?

Don't run the notion that if a particular sector is doing well, the stock of all the companies within the sector will also be performing well. You can find a bunch of good, average and poor performers. So, pick the one that has performed well over the years so that your investment objective can be met.

You must check the portfolio of the sector fund that you are going to overlap with the existing portfolio for proper diversification. In case of a big overlap, you may not get the advantage of diversification. So, the solution here would be to stay invested for 3-5 years to compensate for any loss with the rise. As they say take more risks, get more returns. So, you must assess your risk taking ability first and then choose the fund that meets your investment objectives.

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Selection of the fund should be based on your investment objectives, age and the expert views on the sector. Before the recession, IT sector was on the upswing, so people invested there and made a killing. Let's suppose if you think the RBI is going to cut repo rates in two-three monetary policy reviews in succession, then banking sector stocks could be the ones where you can bet on. For this, you need to have a know-how of the sector and the trends developing there.

For instance, mutual fund houses raised their exposure to IT stocks to the tune of Rs 41,000 cr at the end of March, 2016 due to weakening rupee against the dollar, which raises the profitability of IT exporters. As much as 85% of the revenue of IT firms come from exports, particularly the US and Europe. Currently, the rupee has depreciated to the level of 66.70 against the dollar, falling from 58.44 about 2 years ago.

Advantages

  • As these funds perform well in particular cycles, you can get big profits
  • If you have the knowledge of a particular sector but not confident about investing in stocks, then you can invest in sectoral funds to join the capital market
  • A bunch of different sectoral funds with positive cues can lead to more returns than a diversified equity fund

Top Performing Sector Funds

Scheme Type Minimum Investment NAV Expense Ratio Minimum SIP Investment  
 Franklin Build India Fund (G)  Open-ended  Rs 5,000  Rs 28.97/unit  2.86%  Rs 1,000
 Franklin Build India Fund (D)  Open-ended  Rs 5,000  Rs 19.64/unit  2.86%  Rs 1,000
 Canara Rob Infrastructure Fund-Reg (D)  Open-ended  Rs 5,000  Rs 23.98/unit  2.98%  Rs 1,000
 Canara Rob Infrastructure Fund-Reg (G)  Open-ended  Rs 5,000  Rs 36.21/unit  2.98%  Rs 1,000
 L&T Infrastructure Fund-Reg (G)  Open-ended  Rs 5,000  Rs 10.40/unit  2.88%  Rs 1,000
 L&T Infrastructure Fund-Reg (D)  Open-ended  Rs 5,000  Rs 10.40/unit  2.88%  Rs 1,000
 ICICI Pru Technoogy Fund (G)  Open-ended  Rs 5,000 Rs 41.86/unit  2.75%  Rs 1,000
 Invesco India Infrastructure Fund (D)  Open-ended  Rs 5,000  Rs 12.41/unit  2.78%  Rs 1,000
 Invesco India Infrastructure Fund (G)  Open-ended  Rs 5,000  Rs 12.41/unit  2.78%  Rs 1,000
 Reliance Banking Fund (D)  Open-ended  Rs 5,000  Rs 42.27/unit  2.38%  Rs 1,000
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Note-NAVs of funds are subject to change.

Tax Implication

As sector funds form the part of equity schemes, the long-term capital gain here will be treated as tax-free. Want to know how long-term capital gain results? It happens from the profit generated on the sale of equity funds after 12 months. But the capital gain arising from the sale of assets before the said period will result in a short-term capital gain tax of 15% as well as a security transaction tax of 0.001% on the sale proceeds.

Now that you are aware of the benefits due to sector funds, you should immediately think of investing in the same to give your corpus a big leap. However, be a good judge of risk-taking ability while choosing the fund. The risk profile actually determines the level of risk exposure your investments can at best deal with. You must try not to expose a particular sectoral fund investment beyond 4%-5% of your entire portfolio.