About Sector Mutual Funds
- A sector consists of similar businesses that offer somewhat the same type of product or
service. The Indian economy has several sectors, including information technology, banking, pharma, chemicals,
aviation, etc. These sectors keep evolving based on many factors and developments. For instance, the defence
sector may fare well when the Union Budget announces special aid or growth plans in the sector. - If you want to invest in such sector-focused opportunities, you can consider investing in sector
mutual funds. Also called sectoral mutual funds, these are equity funds that are required to invest at least 80%
of their total assets in the dedicated sector. Within the sector, these funds can invest in stocks with varying
market capitalisations. All in all, they give investors exposure to the best-performing stocks in a specified
sector.
Sector funds can be of various types, as follows:
- Pharma sector funds: These invest in pharma stocks, biotechnology and life
science technology stocks, manufacturers of medical and healthcare stocks, etc. - Information Technology (IT) funds: These invest in companies relating to IT,
electronics, etc. - Banking and financial services funds: These invest in major Banking,
Financial Services and Insurance (BFSI) companies. - Auto sector mutual fund: This fund invests in auto sector companies, including
manufacturing and ancillary businesses. - Energy sector mutual fund: This fund invests in stocks of companies engaged or
related to the energy sector, whether in the production or exploration of alternative energy.
Since sectoral funds focus on a particular sector, they are exposed to a high risk of concentration. As such, in
a bearish market or in case of underperformance of a sector, the fund can run into significant losses. On the
other hand, if the sector has bright prospects, the fund can perform very well.
How Do Sector Funds Work?
A sector fund invests in securities of companies belonging to the same sector. A sector comprises different companies that offer the same types of products or services. For instance, in the Indian economy, there exist several sectors such as banking, information technology, chemicals, pharma, healthcare, and more. If you wish to invest in a mutual fund that invests capital in a specific sector, you may consider sector-oriented mutual funds. Sectors are constantly evolving and growing due to many factors.
Sectoral funds are essentially equity-based funds that are required to invest a minimum of 80% of their capital in the sector in question. Within a particular sector, sectoral funds can invest in equity of differing market capitalisations. Sectoral funds work to give investors exposure to potentially optimal performing equity within a certain sector.
Features of Sectoral Mutual Funds
- Higher concentration risk: Sector funds limit their investment to a specific sector. As such, your portfolio's performance is vulnerable to that sector's performance.
- Diversification: Though sectoral funds focus on a single sector, they can diversify by investing in stocks across market capitalisations within it.
- Growth in the sector: Not all sectors grow at a similar pace, as they have different opportunities and limitations. For instance, the information technology sector disrupts at a faster pace compared to FMCG.
- Peaks and plunges: Although sectors have phases of peaks and plunges, you can invest in sectoral funds regardless of the phase via SIP. This could help you benefit through compounding and cost averaging.
- Long-term investments: Since sector funds are equity-oriented schemes, it is best to invest in them for a longer horizon to beat volatility in the short run.
Advantages of Investing in Sector Funds
- High growth potential: Sector funds enjoy high growth potential when the underlying stocks of the chosen sector are performing well. Hence, your returns maximise.
- Professional management: Like other mutual funds, professional fund managers manage sector funds too. Therefore, you can benefit from their expertise.
- Long-term investment: Sector funds are excellent investments for long-term financial goals. Ideally, you should stay invested in these funds for over 5-7 years to fully reap the benefits.
Risks Involved in Sector Funds
- Market risk: Since sectoral mutual funds invest in equity, they are exposed to market risks and volatility.
- Liquidity risk: In case you wish to redeem your units in a sector downturn, the mutual fund house may find it difficult to find sellers to liquidate your holdings.
- Low diversification risk: Sector funds focus on a specified sector, which limits the scope of diversification across other industries and asset classes.
- Cyclical risk:The fund may be adversely impacted by the risk of business cycles or economic cycles. For example, after 2008, infrastructure had a significant downcycle, and after 2011, capital goods experienced a similar phase. Had you invested 50% of your portfolio in these funds because you were bullish on them, you would have incurred heavy losses. Therefore, it is best to diversify and take calculated risks, especially when it comes to investing in sectoral funds.
Factors To Consider Before Investing in Sector Mutual Funds
Mutual funds are typically designed to diversify your portfolio and sectoral funds aim to do this by investing their assets in a specific sector. Before you attempt to invest in sectoral funds, you need to consider the following:
- Investors may need to conduct preliminary market research on the particular sector they are choosing to invest in before doing so as sector funds require you to take a chance on the prospect of a single industry. You would not want to make the mistake of placing all your eggs in one basket and exposing yourself to risk.
- Whether you are new to investing or an experienced player, it is imperative that you grasp knowledge of the sector you choose to invest in so as to have a clue about its potential growth prospects. You should be aware of what drives particular sectors and how this takes place.
- Consider your horizon of investment when you wish to invest in sector funds. Sectors differ in terms of their potential growth and various factors affect different sectors. Some sectors may grow faster than others, so investors must be prepared for long-term investment if required.
- Think about your overall portfolio when you wish to invest in a sectoral fund. If your aim is portfolio diversification, you may contemplate a particular sector to invest in if you have securities and instruments that do not include this kind of investment.
- Think about your own investment style and behaviour before you invest. Are you ready to take risks if it does affect your fund? Think of these things before you go ahead and invest.
- Similar to any other mutual fund, you are able to invest in sectoral funds both during peaks and plunges via the route of a SIP (Systematic Investment Plan). Such systematic and regular investments over periods may help you benefit by cost averaging as well as compounding.
Who Should Invest in Sector Mutual Funds?
- Requires professional expertise: Like other mutual funds, professional fund managers manage sector funds. So if you want to capitalise on a sector but aren’t sure about which stocks to choose, sectoral mutual funds could be a good option.
- Can bear high risk: Sector mutual funds are highly risky not just because they are equity-oriented but also because they have a limited scope for diversification. However, if a sector does well, the sectoral fund can perform well too, and vice versa. So investors with high-risk tolerance should consider investing in such funds.
- Needs exposure to a specific sector: You can consider investing in a particular sector fund if your overall investment portfolio lacks exposure to that.
Taxability of Sector Funds
Sector funds are treated as equity funds for tax purposes.
Here’s how capital gains from selling sector fund units are taxed:
- Short-term Capital Gains (STCG): Gains on sector fund units sold within a year of buying are taxed at 15% plus applicable cess.
- Long-term Capital Gains (LTCG): Gains up to Rs. 1 lakh per year on selling sectoral fund units after a year of holding them are tax-free. Gains beyond this limit are taxed at 10% with no indexation benefit.
Besides, dividends earned on sector funds are added to the investor's taxable income and taxed at the rate as per the income tax slab. There is also a 10% TDS on dividend amount exceeding Rs. 5000 in a financial year.
How To Invest in Sector Funds?
Investing in a Sector Fund is hassle-free when done through your Angel One account. You just have to follow these simple steps:
Step 1: Log in to your Angel One account.
Note: In case you do not have an account with Angel One, you can open a demat account with us in under a few minutes by submitting the necessary documents.
Step 2: Determine a Sector Fund fund that suits your needs and risk profile. You can learn more about each Sector Fund on the Angel One app. Things to consider at this stage are:
- Search for the fund you want to invest in.
- Analyse the fund’s past performance, tax incidence, and the sectors and companies it invests in. You can also calculate the potential returns using the calculator.
- Evaluate the fund’s level of risk, its ratings and expense ratio.
Step 3: Once you finalise the Sector Funds you want to invest in, open your Angel One account, go to the Mutual Funds section, and look for it.
- Decide whether you want to invest via SIP or make a one-time investment
- Decide your monthly SIP date. Now, enter the amount you want to invest and choose the payment mode.
- After placing the order, you can create an AutoPay to make hassle-free future instalments in case of SIP investments.
Top 5 Sector Mutual Funds
The following are the top Thematic/Sectoral Funds in India:
| Name of the Fund | AUM (₹ Cr) | CAGR 5Y | Expense Ratio | Alpha | Sharpe Ratio | CAGR 3Y |
| Quant Infrastructure Fund | 3535.99 | 33.00 | 0.68 | 1.23 | 0.37 | 20.92 |
| ICICI Pru Commodities Fund | 2399.14 | 30.27 | 0.95 | 2.51 | 0.33 | 16.89 |
| DSP Healthcare Fund | 3339.79 | 29.34 | 0.57 | 3.16 | 2.03 | 23.62 |
| ICICI Pru Technology Fund | 13989.68 | 29.14 | 0.98 | 1.11 | 1.05 | 11.38 |
| SBI Healthcare Opp Fund | 3628.03 | 28.72 | 0.89 | 2.62 | 1.94 | 24.98 |
The above-mentioned funds are for informational purposes only and are not recommendations. The funds are ranked based on 5-year CAGR as of January 2025.
Quant Infrastructure Fund
The Quant Infrastructure Fund ranks 1st with a 5-year CAGR of 33.00%. It has an AUM of ₹3,535.99 crore and an expense ratio of 0.68%, which is the 3rd highest among the 5 funds.
The fund’s alpha is 1.23, and its Sharpe ratio of 0.37 reflects moderate risk-adjusted returns. Over the past 3 years, it has delivered a CAGR of 20.92%, ranking 4th in 3-year performance.
ICICI Pru Commodities Fund
The ICICI Pru Commodities Fund ranks 2nd with a 5-year CAGR of 30.27%. It has the lowest AUM among the 5 funds, at ₹2,399.14 crore, and an expense ratio of 0.95%, which is the 2nd highest.
The fund’s alpha of 2.51 is 3rd highest in the list, while its Sharpe ratio of 0.33 is the lowest. Over the past 3 years, it has delivered a CAGR of 16.89%, ranking 5th in 3-year performance.
DSP Healthcare Fund
The DSP Healthcare Fund ranks 3rd with a 5-year CAGR of 29.34%. It has an AUM of ₹3,339.79 crore and an expense ratio of 0.57%, which is the lowest in the list.
The fund’s alpha of 3.16 is the highest among the 5 funds, and its Sharpe ratio of 2.03 is also the highest, reflecting strong risk-adjusted returns. Over the past 3 years, it has delivered a CAGR of 23.62%, ranking 3rd in 3-year performance.
ICICI Pru Technology Fund
The ICICI Pru Technology Fund ranks 4th with a 5-year CAGR of 29.14%. It has the highest AUM among the 5 funds, at ₹13,989.68 crore, and an expense ratio of 0.98%, the highest in the list.
The fund’s alpha of 1.11 is the lowest positive alpha in the list, and its Sharpe ratio of 1.05 ranks 4th. Over the past 3 years, it has delivered a CAGR of 11.38%, ranking 5th in 3-year performance.
SBI Healthcare Opportunities Fund
The SBI Healthcare Opportunities Fund ranks 5th with a 5-year CAGR of 28.72%. It has an AUM of ₹3,628.03 crore and an expense ratio of 0.89%.
The fund’s alpha of 2.62 is the 2nd highest, while its Sharpe ratio of 1.94 is also the 2nd highest, reflecting favourable risk-adjusted returns. Over the past 3 years, it has delivered a CAGR of 24.98%, which is the highest in the list for 3-year performance.