Mutual funds: What are sectoral funds and why should you invest in them?

As a new mutual fund investor, one of the most common dilemmas one tends to face is the category of fund wherein one should invest. Typically, investors are recommended to opt for an index mutual fund which hedges the risk by investing across stocks and sectors.

Some common index mutual funds are Nifty50 Fund, Nifty100 fund, Sensex 500 Fund and Nifty250 small cap fund, and so forth.

However, what should one do if one is committed towards a particular sector or theme -- say innovation, consumption, manufacturing, technology, among others. Invest in a sectoral/thematic fund? These funds are meant for the ones who are committed to a particular sector or theme.

What are sectoral/thematic funds?

As per the Sebi’s categorisation of mutual fund schemes, sectoral/thematic funds are supposed to invest at least 80 percent of their total assets in equity and equity-related instruments of a particular sector or theme.

Sectoral funds: These funds invest in a particular sector of the economy such as infrastructure, banking, technology or pharmaceuticals.

Thematic funds: These funds select stocks of companies in industries that belong to a particular theme, for example, infrastructure, service industries, PSU or MNCs.

There are a total of 215 schemes in this combined category with total assets amounting to ₹4.92 lakh crore, highest among all equity mutual fund categories followed by flexi cap funds (which have total assets of ₹4.71 lakh crore).

Some of the top performing sectoral/thematic funds which have delivered high returns in the past five years include Aditya Birla Sun Life Infrastructure Fund (31.97 percent), Aditya Birla Sun Life PSU Equity Fund (32.87 percent), Bandhan Infrastructure Fund (35.57 percent) and ICICI Prudential technology Fund.

Why should one invest in these mutual funds?

There could be numerous reasons for investing in these funds:

A. When an investor is too committed to a particular sector or theme such as a techie wants to invest in a technology fund.

B. When the chances of a sector to grow are very high. For instance, in response to the government investing huge money in infrastructure projects, investors made a beeline for funds focusing on this sector.

C. When an investor wants to make a focused investment, which is broader than a stock but not as diversified as the index.

Meanwhile, it is important to note that sectoral/thematic funds focus on just one sector/theme and therefore they limit diversification and are, therefore, riskier. “Typically, investors should allocate only 15-20 percent of portfolio to all sectoral/thematic funds combined,” says Sridharan S, a Sebi-registered investment advisor and founder of Wealth Ladder Direct.

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