Sectoral / Thematic

What Are Sectoral Funds?

As the name suggests, Sectoral funds are open-ended equity schemes with a large corpus of investment in a specific sector. These funds concentrate their investment portfolio on equities of companies across different market capitalizations in a particular sector. Some of the most common sectors in India are energy, infrastructure, healthcare, utilities, etc.

Sectoral funds can deliver market-beating returns to investors in favorable times when the specific sector is expanding and performing well. These funds allow people to use their knowledge of the market and economy to reap profits by investing in the best-performing stocks in a particular sector.

However, as these funds focus the portfolio on one sector, there is a higher concentration risk. There is less room for diversification, meaning the risk associated with sectoral funds is high. The losses associated with the funds can be huge when the market sees a bearish trend and the sector does not perform well.

The Indian economy comprises many sectors like pharma, banking, technology, etc. Some of these sectors can perform extraordinarily well in the medium to long term. Sectoral funds are aimed at helping investors capitalize on these opportunities. Moreover, these funds invest in companies from small to mid and large capitalizations; the only requirement is that they should come from the same sector.

Who Should Invest In Sectoral Funds?

Sectoral funds can certainly be rewarding if investors can hit the right spot. However, due to a lack of diversification, they also have a high risk associated with them. So, one should only consider this type of fund after considering their financial goals, risk appetite, and investment horizon. Sectoral funds are an ideal investment option for:

  • Active and Informed Investors – Sectoral funds are unsuitable for beginners and inexperienced investors. Investments in these funds require timing the entry and exit right, which experienced traders struggle with. Active investors who are always on top of the latest news and happenings in the market can understand which sector is likely to perform well in the medium to long term. These funds are suitable for experienced investors with good knowledge of the sectors and insights based on thorough research.
  • Investors with a Good Risk Appetite – Sectoral funds invest in specific sectors and lack diversification which means they are high-risk schemes. Hence, investors comfortable with risky investments should only consider these funds.
  • Investors Interested in Tactical Allocation – Some sectors are cyclical, so investors willing to risk getting exposed to companies at the bottom of their cycle can invest in sectoral funds to make profits. You can choose a sector at the bottom of the cycle and hold the investment till it achieves its optimum performance before selling the funds to take profits.

Features Of Sectoral Funds

The primary features of sectoral funds are:

  • Sector-Focused – These mutual funds are focused on a specific sector. Funds can be categorized into different kinds based on the sector they belong to. These funds are not diverse and depend significantly on the sector’s performance.
  • High Returns – Almost 80% of the investment is put in equity instruments per the SEBI mandate, so sectoral funds offer outstanding returns. Also, they are all about grabbing the opportunity to profit from growing sectors. With proper research, investors can identify the right sectors performing well and select sectoral funds suiting their financial goals.
  • High Risk – For several reasons, sectoral funds are one of the riskiest investments. Firstly, being an equity fund, they are subject to risks from market volatility. Secondly, focusing on a specific sector reduces diversity and makes them prone to concentration risks. Lastly, if the fund encounters loss, selling the stocks won’t garner sufficient corpus, exposing you to liquidity risk.

Taxability Of Sectoral Funds

As sectoral funds are equity funds, the capital gains from these funds are taxed like any other equity scheme. The gains earned from selling the sectoral funds are taxed according to the duration the investment is held for.

Short-term capital gains made from selling the units within a year of the investment are taxed at a flat rate of 15%, irrespective of your income tax slab. On the other hand, gains from any sectoral fund held for over a year are classified as long-term capital gains and are taxed at 10% if they are over 1 lakh INR. Gains of up to 1 lakh INR in any financial year are not taxed.

Risk Involved With Sectoral Funds

As sectoral funds consider investing mainly in equity instruments, they carry the following risks:

Risk of concentration – As these funds invest heavily in equity instruments, they carry a high concentration risk. This is why experts classify these funds as the riskiest mutual funds.

Liquidity risk – This is the risk a fund manager faces when he fails to sell the securities in a situation of loss.

Volatility risk – Market fluctuations directly influence these funds. If the underlying sector performs well, the fund may deliver significant returns. On the contrary, the sector’s poor performance can magnify the losses to a great extent.

Advantages Of Sectoral Funds

If your investment portfolio lacks exposure to a specific sector, sectoral funds offer an excellent way to invest in that sector. These funds allow exposure to the whole sector that is likely to grow. Here are the main advantages of investing in sectoral funds:

  • Not every sector moves in tandem with the economy. Many of them are cyclical in nature, which means you can expect huge returns by investing in sectors that show outstanding performance. Based on your analysis and research, if you enter at the right time and hit the right spot, there is a chance of earning huge returns through sectoral funds.
  • Though sectoral funds don’t offer diversification in industries and asset classes, they are pretty diverse regarding market caps. These schemes invest in multiple companies across different market capitalizations to balance the investment portfolio. Even when some equities don’t perform well, others outweigh them.
  • The most impressive benefit of investing in sectoral funds is their ability to deliver inflation-beating returns. Investors can consider adding these funds to their portfolio to leverage a growing sector to meet their financial goals.
  • Sectoral funds are the perfect investment option for those looking to benefit in the long term. Investing in a sector likely to perform well in a few years can help fulfill long-term financial goals like retirement planning.
  • Another advantage of investing in sectoral funds is that professional fund managers manage these schemes. If you have confidence in a sector and cannot select the companies to invest in, you can invest in these funds through professional management to get significant returns.

Who Are These Funds Suited For?

Sectoral funds have a higher risk of concentration as they invest in stocks of a specific sector. This is why these schemes suit aggressive and experienced investors or those willing to take higher risks for the potential to earn huge returns. Moreover, at least five years, one should have a bigger investment horizon to let the sector grow and deliver returns.

Here are a few factors worth considering before investing in sectoral funds.

  • Investment Risks – These funds are concentrated and don’t diversify your portfolio. While other equity mutual funds invest in securities across sectors, sectoral funds are restricted within a sector and don’t allow taking advantage of other market sectors. This means if a sector does not do well, there is nothing else in your portfolio that can compensate. So, despite the vast return potential, this type of investment risks are pretty high.
  • Investment Goals – Investors thinking about putting money in sectoral funds should be clear about their goals. To achieve the maximum from the funds, you must plan to invest in these schemes for a minimum of five years. Any sector can take considerable time to show its best performance. This means they are suitable for long-term investment goals like funding children’s education, retirement, etc.
  • Expense Ratio – Another important thing you should be clear about before investing in sectoral funds is the expenses influencing your gains. The AMCs charge a fee for managing your sectoral funds, which is called the expense ratio. Knowing the exact charge, you pay per year is essential to calculate your investment returns.
  • Exposure Limit – One should consider investing in sectoral funds only as a part of a well-diversified portfolio. As the risk is relatively high for these funds, you should not give a lot of weightage to them in your portfolio. The exposure should be limited to 5-10 percent of your total investment.
  • Performance of the Sector – Sector trends are often cyclical. It is therefore wise to analyze the present and past performance of the sector you are interested in. As these are focused funds, it is essential to know their trends to be able to predict their future performance.

Best Sectoral Funds in India

Let us look at the top 10 best-performing sectoral funds you can consider for your investment in 2022.

Aditya Birla Sun Life Digital India Fund

This is a mutual fund scheme in the technology sector from Aditya Birla Sun Life Mutual Fund. It was launched in 2013 and is a medium-sized fund with 3135 crore INR worth of assets under management as of June 2022. The fund’s expense ratio is 0.85%, which is similar to what most other sectoral funds charge. The fund uses the benchmarks S&P BSE Teck TRI.

Minimum Investment:

  • INR 1000 for lumpsum
  • INR 1000 for SIP

Fund Performance: Since inception, the scheme has delivered average annualized returns of 22.07%. Its 1-year annualized returns are -14.66%, while the 3-year annualized returns are 29.64%.

Tata Digital India Fund

This is a sectoral fund from Tata Mutual Fund in the technology sector. It was introduced in 2015 and had an AUM of INR 5981 crores. The scheme aims to deliver consistent returns in line with most other category funds. It invests primarily in Capital Goods, Communication, Technology, and Financial sectors. It has an expense ratio of 0.34%, which is relatively less than other sectoral funds.

Minimum Investment:

  • INR 5000 for lumpsum
  • INR 150 for SIP

Fund Performance: Since inception, the scheme has delivered average annualized returns of 20.58%. The fund has doubled the money invested in three years.

ICICI Prudential Technology Fund

A technology mutual fund from ICICI Prudential Mutual Fund, this sectoral fund was launched in 2013 and is a medium-sized fund in its category. The scheme broadly invests in Energy, Capital Goods, Communication, Technology, and other sectors. Its AUM is INR 8712 crores as of June 2022. The expense ratio is 0.78%, similar to most other funds of the type.

Minimum Investment:

  • INR 5000 for lumpsum
  • INR 100 for SIP

Fund Performance: Since inception, the scheme has delivered average annualized returns of 22.91%. Its 3-year annualized returns are 34.6%.

Franklin India Technology Fund

This technology fund from Franklin Templeton Mutual Fund is one of the best-performing sectoral funds. It was started in 2013 and currently has 686 crore INR worth of assets under management. It has an expense ratio of 1.43%, somewhat higher than others in the category. The scheme invests mainly in the Communication, Technology, Financial, and Capital Goods sectors. It uses the benchmark S&P BSE Teck TRI.

Minimum Investment:

  • INR 5000 for lumpsum
  • INR 500 for SIP

Fund Performance: Since inception, the scheme has delivered average annualized returns of 18.01%. The fund has doubled the money invested in three years.

SBI Technology Opportunities Fund

Launched back in 2013, this fund from SBI Mutual Fund is a sectoral scheme in the technology sector. It is a medium-sized fund with 2534 crore INR worth of assets under management as of June 2022. It aims to deliver consistent returns in line with most other category funds and has a standard expense ratio of 0.89%. The scheme mainly invests in Capital Goods, Communication, and Technology sectors.

Minimum Investment:

  • INR 5000 for lumpsum
  • INR 500 for SIP

Fund Performance: Since inception, the scheme has delivered average annualized returns of 20.95%. Its 3-year annualized returns are 26.38%.

Sundaram Rural and Consumption Fund

Launched in 2006, this sectoral fund from Erstwhile Sundaram Rural India Fund aims to generate consistent returns by investing mainly in equity and related instruments of companies focused on rural India. It has 1206 crore INR worth of assets under management and an expense ratio of 2.24%. It is an equity scheme with moderately high risk.

Minimum Investment:

  • INR 5000 for lumpsum
  • INR 100 for SIP

Fund Performance: Since inception, the scheme has delivered average annualized returns of 12.1%. Its last 1-year return was 19.3%.

IDFC Infrastructure Fund

This sectoral fund aims to generate capital growth by investing in the stocks of companies indulged in infrastructure activities in India. The fund was introduced in 2011 and currently holds assets under management worth 626 crores INR. It has a high expense ratio of 2.51%.

Minimum Investment:

  • INR 5000 for lumpsum
  • INR 100 for SIP

Fund Performance: Since inception, the scheme has delivered average annualized returns of 8.5%. Its 1-year annualized returns for 2021 were 64.8%.

Kotak Infrastructure & Economic Reform Fund

Launched in 2008, this sectoral equity fund aims to generate long-term capital appreciation through a portfolio investing primarily in equity and related securities of companies focused on infrastructure and economic reforms. It currently has an AUM of 579 crore INR and has a high risk associated with it. The expense ratio is 2.36, which is higher than most other funds in the category.

Minimum Investment:

  • INR 5000 for lumpsum
  • INR 1000 for SIP

Fund Performance: Since inception, the scheme has delivered average annualized returns of 9.6%. Its return for the year 2021 was 57.3%.

Mirae Asset Great Consumer Fund

Launched in 2011, this sectoral fund aims to generate capital growth over the long term with a portfolio of companies directly or indirectly related to India’s consumption. It is a high-risk equity scheme with assets under management worth 1851 crore INR. It has an expense ratio of 1.99%.

Minimum Investment:

  • INR 5000 for lumpsum
  • INR 1000 for SIP

Fund Performance: Since inception, the scheme has delivered average annualized returns of 17%. Its 1-year annualized returns were 33% in 2021.

Nippon India Power and Infra Fund

This sectoral fund focuses on capital generation over the long term by investing in stocks of companies in the power sector in India. The fund currently has assets under management worth 1680 crore INR and an expense ratio of 2.36%, which is higher than most other funds in the category. It was launched in 2004 and has delivered consistent returns over the years.

Minimum Investment:

  • INR 5000 for lumpsum
  • INR 100 for SIP

Fund Performance: Since inception, the scheme has delivered average annualized returns of 16.8%. Its 1-year annualized returns for 2021 were 48.9%.

Frequently Asked Questions

Thematic funds are ideally suited for investors with high-risk appetites and a certain conviction regarding the oncoming broad-based trends they are interested in pursuing.

Investors risk a substantial downside due to high exposure to specific trends and themes. These opportunities fail to materialize, which is why it is best suited for investors with a diverse portfolio of other assets, which can protect any substantial losses from such concentrated holdings.

Any fund with allocations concentrated in a particular sector remains vulnerable to headwinds affecting that sector.

For example, rising interest rates can have a major short-term impact on real estate and construction stocks, so a fund focused on this sector can witness a significant drawdown across all its key holdings.

Such funds are mainly suited for investors who already maintain a portfolio of diverse holdings and are looking to spruce returns or hedge against certain events.

In a thematic fund, portfolio managers often pick stocks that revolve around a particular trend or idea.

For example, if robotics is believed to have a shining future in the coming years, the thematic fund focused on the same will allocate assets to stocks such as ABB, and KUKA, which have a strong robotics play, along with integrators and managed service providers such as Infosys, TCS, and HCL.

With this, investors with high levels of conviction regarding the vibrant future of a particular sector can make the most of it with concentrated exposure to the same.

Thematic funds have witnessed quite the frenzy in recent years, and new funds and options continue to spring up every few weeks, targeting specific trends and the investors who want to make the most of it.

Any long-term secular opportunity can be tapped into, including climate change, ESG, machine learning, fintech, and more. 

There are, infact, thematic funds dedicated toward emerging market holdings, space exploration, and even video games.

While the differences are already quite evident, at their core, both concepts aim at differing objectives and target different breeds of investors.

A thematic fund usually takes a long-term view of various macroeconomic, geopolitical, and technological tailwinds and aims to capitalize on the same. These aren’t for investors who are looking to capture swings in the market.

On the other hand, a sectoral fund is focused on a particular sector. It is usually the purview of investors and traders looking for exposure owing to upcoming short-term events. They are also used for hedging when anticipating pullbacks in the broader market.

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