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What is a sector mutual fund?

Sector mutual funds, sometimes also referred to as sectoral funds or sectoral mutual funds, are mutual funds that invest solely in businesses in a particular sector of the economy. As per SEBI regulations, a mutual fund scheme can be called a sectoral mutual fund if it invests 80% or more of its total assets in equity and equity-related instruments of a particular sector. There is no restriction on the company size with respect to its market capitalisation.

Sector mutual funds, by definition, offer less diversification than other types of mutual funds since the investment is predominantly in one sector of the economy. However, they allow investors to take advantage of growth in a particular industry segment.

Types of sector mutual funds

Sector mutual funds focus their investments on specific industries or sectors, aiming to capitalize on the growth potential of those areas. These funds offer investors the opportunity to target their investments in industries they believe will outperform the broader market. Here's a look at the various types of sector mutual funds available:

Tech funds: Mutual funds that invest in companies from the technological sector including IT fall in this category.

Healthcare funds: Sector mutual funds that invest in medical institutes, pharmaceutical companies, diagnostic lab chains, etc. are called healthcare funds. These may also be labelled as Pharma funds.

Banking and financial sector funds: All the mutual funds that predominantly invest in companies in the banking, finance, insurance, and accounting sectors are known as financial funds.

Natural resources funds: These are mutual fund schemes that invest in companies dealing with energy, oil, natural gas, and so on.

Let’s understand the sector of mutual funds' meaning with a simple example. An investor who believes that the IT sector is going to grow more over the next 5 years, can invest in technology funds instead of choosing to buy shares of multiple tech companies. This way the investor can earn potential returns whether the Blue-chip giants grow or start-ups.

Who should invest in sector mutual funds?

Investors who are willing to take a substantial risk by limiting themselves to an industry sector can invest in sector funds. However, they can limit the risk by diversifying their portfolio with other investments such as large cap funds, blue-chip funds, debt funds, real estate, precious metals, etc.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.