What is a Sector Mutual Fund?
The Sector Mutual Fund is an equity fund that invests in specific sectors of the economy. These sectors include utilities, energy and infrastructure, etc. Sector funds, sometimes referred to as sectoral funds, allow you to invest in stocks of companies with different market capitalizations and asset classes. These funds allow investors to invest in the best performing stocks in a particular sector.
Some of the types of sector funds include:
The types of sector funds majorly include:
Technology: These Sector funds primarily invest in electronic devices and other information technologies used in a variety of applications
Finance: Investors can invest in securities of insurance, banks, investments and accounting companies
Utilities: Invest funds in these utilities and release dividend distributions. This type of fund is suitable for conservative investors who want to invest in fixed income financial products.
Natural Resources: Natural Resources Fund is suitable for long-term growth investors, investing in oil, gas and other energy resources.
Real Estate: This type of fund provides small investors with the opportunity to investigate the profits of the real estate sector. Investors receive both income and growth benefits.
Healthcare: The Healthcare Fund includes pharmaceutical companies, biotechnology companies, and companies that have achieved breakthroughs in the industry. Funds in the sector are at risk because they are exposed to market volatility.
Some industrial sectors work well in bull markets and can suffer in bear markets. However, few sectors can make high profits even in a recession.
Why do you need to invest in a sector fund?
If your portfolio does not have exposure to a particular sector, sector funds are a great way to invest in that sector in a diversified way. Sector funds allow investors to gain exposure across potential growth sectors, rather than investing directly in the stocks of companies in the sectors mentioned above.
Sector funds can also help investors hedge their portfolios. For example, a surge in energy prices could harm other industries, but the energy sector will grow. Therefore, investors can invest in sector funds focused on energy companies to hedge their portfolios. With increasing demand for a particular product, all companies in this branch have the potential to grow.
When investing in a sector fund, you can get good returns by investing in a high-performing company in that sector. However, this has its drawbacks. Recessions can be costly, as funds invest primarily in one sector.
Taxation of Sector Funds
Since sector funds are a type of equity fund, the capital gains offered by these funds are taxed like any other equity fund. Short-term capital gains are taxed at a flat rate of 15%, regardless of income tax rate. Long-term capital gains of up to 100,000 rupees per are exempt from tax. Profit exceeding the specified limit is taxed at 10% tax and there is no benefit of indexing.
Advantages of Sector Funds
Investing in sector funds offers variety of advantages as mentioned
- You may get the potential to earn inflation-beating returns.
- You may get the benefit of exposure towards a diversified portfolio which may be constituted by equities of companies across all market capitalisations of a specific sector.
- Sector funds are one of the excellent investment options for investors having long-term financial requirements.
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