28 Sep 2023
When it comes to investing, there are countless options available to suit various risk appetites, investment goals, and strategies. One such option is sectoral funds.
Sectoral funds are a type of mutual fund schemes that focus on specific industries or sectors of the Indian economy. In this blog post, we'll delve into what sectoral funds are, and can you consider to incorporate them into your investment portfolio.
What Are Sectoral Funds?
A sectoral fund focuses its investments on specific industries or sectors. Such as banking, pharmaceuticals, natural resources, FMCG, information technology, real estate, and energy, etc., among others.
Sectoral funds can yield returns in long term, but precise timing is essential and they are highly risky. This is due to the fact that sectors follow the business cycle, and the fund is affected by the cycle's ups and downs.
For example, think about the pharmaceutical industry, which was seen as less risky until it encountered global regulatory challenges. The COVID-19 pandemic, on the other hand, significantly boosted this industry. Similarly, the IT sector thrived amid the pandemic's digital push, leading to high expectations for modernization gains. Investors favoured IT-focused mutual funds based on their historical performance, but ongoing market volatility is challenging the wisdom of these choices.
The table below presents the performance and net inflow data for sector funds over the past year:
As on 31st Aug 2023, Source: ICRA, for calculation of net flows into sectors - flows into sectoral funds, ETF and Index funds for 1 year considered.
It reminds of a well-known analogy: "Manzil thi kahin aur, pahunch gaye kahin aur." Many investors heavily invested in IT funds due to their past performance, but in reality, the banking and healthcare sectors performed better than IT sector in last 1 year. Surprisingly, these 2 sectors attracted outflows compared to the IT sector.
Rear view driving in sectoral funds can be dangerous. It's quite tempting to invest in a sectoral funds that is currently delivering high returns, hoping that its successful streak will continue. Unfortunately, in most cases, that doesn't happen because the top performers change almost every year.
Conclusion
Sectoral funds can be a valuable addition to your investment tool kit, offering the potential for precision investing and strategic diversification. However, they also come with unique risks and require careful consideration and research.
Timing the entry and exit in a specific sector accurately can be challenging. Therefore, investors are encouraged to seek guidance from financial advisors if they intend to make tactical allocations to sectoral funds and consider allocation in their overall portfolio as per their risk appetite.
Disclaimer
Source: MFI ICRA explorer; Data as on 31st Aug, 2023. The Index/Indices referred are for information purpose only. The data/ terms/terminologies/references used are only to portray the factual performance details of various indices over a particular period. The same should not be construed as any kind of recommendation. The markets are volatile and can change basis the different market conditions. It is just an example used to represent that instead of making any uninformed decision or in case of lack of clarity about the market and its conditions, investors may consult a financial advisor/expert before making any investment decision. KMAMC is not guaranteeing or promising or forecasting any returns/future performances. Past performance may or may not be sustained in future.
The performance of the index shown does not in any manner indicate the performance of the Scheme. The stocks/sectors mentioned do not constitute any kind of recommendation and are for information purpose only. Kotak Mahindra Mutual Fund may or may not hold position in the mentioned stock(s)/sector(s).
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY