Sector Funds is a type of mutual funds wherein the investment is concentrated in specific sector. As I have discussed previously, Sector Fund involves more risk when compared to Equity Mutual Fund as diversification of fund is restricted.
Sector Fund is a decent investment option provided you have fair knowledge about the stock market and performance of sector specific funds. Sector Fund is meant for aggressive investors who are willing to take additional risk and are unperturbed by volatility of fund.
Click to Read More About Sector Funds: An Insight
Factors in favor of Sector Mutual Funds:
Sector Fund may be a good investment option when the equity market is under performing, however some of the sectors are doing well during the same period.
Sector Mutual Funds can take advantage of bullish trend in specific industry which would result in the sector outperforming the overall market trend.
However, these funds have some shortcomings as well:
Sector Funds have a very narrow scope of diversification. Thereby, if a sector is faced with adverse scenario then the fund is bound to suffer and there won’t be any respite until the Sector revives itself.
High Volatility makes these Funds very unpredictable as some sectors may do exceptionally well in a particular year and fall flat in the succeeding year or the vice versa.
Investors should remain cautious and should conduct in depth fundamental analysis before investing.
Performance of Top Sector Funds (across sectors) over the Past 5 years
Only Funds operational for 5 years or more have been taken up for study.
Sector Funds are highly volatile and restricted diversification of funds also makes it a high risk investment. In my opinion, until and unless the fundamentals are very strong for any specific sector, Individuals should refrain from making an investment. However, if a Sector seems fundamentally strong, backed by favorable business policies and market scenario then Individuals should tap into such opportunities.