Sector Mutual Funds

Sector mutual funds are those mutual funds that restrict their investments to a particular segment or sector of the economy. Also known as thematic funds, these funds concentrate on one industry such as infrastructure, banking, technology, energy, real estate, power heath care, FMCG, pharmaceuticals etc. The idea is to allow investors to place bets on specific industries or sectors, which have strong growth potential.

These funds tend to be more volatile than funds holding a diversified portfolio of securities in many industries. Such concentrated portfolios can produce tremendous gains or losses, depending on whether the chosen sector is in or out of favour. Sectoral mutual funds come in the high risk high reward category and are not suitable for investors having low risk apetite.

Generally, mutual fund houses avoid launching sectoral funds as they are seasonal in nature and do well only in cycles. Since these funds focus on just one sector of the economy, they limit diversification and the fund manager’s ability to capitalise on other sectors, if the specific sectors aren’t doing well. Unless a particular sector is doing very well and its long term growth prospects look bright, it advisable not to trade in sector funds.