Monday, April 11, 2011

Sector Mutual Funds

Sectoral funds are those mutual funds which invest in a particular sector or industry of the market, e.g. infrastructure, banking, pharma, information technology etc. They are also known as the thematic funds where investment is concentrated on only one industry or a group of industry. Sector funds are riskier than equity diversified funds since they invest in shares belonging to a particular sector which gives them fewer diversification opportunities. The idea is to allow investors to place bets on specific industries or sectors, which have strong growth potential.

These funds tend to be more volatile than funds holding a diversified portfolio of securities in many industries. Such concentrated portfolios can produce tremendous gains or losses, depending on whether the chosen sector is in or out of favor. Sectoral mutual funds come in the high risk high reward category and are not suitable for investors having low risk appetite.

Generally, mutual fund houses avoid launching sectoral funds as they are seasonal in nature and do well only in cycles. Since these funds focus on just one sector of the economy, they limit diversification and the fund manager’s ability to capitalize on other sectors, if the specific sectors aren’t doing well. Unless a particular sector is doing very well and its long term growth prospects look bright, it advisable not to trade in sector funds.
Sector mutual funds sometimes give 100% or even more return than the traditional mutual funds because at first business seem to gain huge profits and they also declare huge dividends to its share holders. As the business cycle works on the growth reaches its optimum and finally they start to bend down and that is when there is some amount of risk involved in it.These funds are concentrated in nature and they can produce tremendous amount of gain or loss depending on the sector in which the money is invested or according to the prevailing market conditions. A low profiled investor will not prefer this type of fund since there is a danger or huge losses. Few points that are to be kept in mind while in trading in sector funds are that the investment manager should have a very vivid knowledge about the industry in which he is going to invest.

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