Which Sector Fund Should You Bet On?

Some investors fervently support ‘high-risk, high-return’ ventures in the world of investing. And for such risk-takers, mutual fund houses have an offering in the form of sector funds. According to their investing aim, sector mutual funds invest in certain sectors. Some industries, including banking, pharmaceuticals and infrastructure, have experienced sustained growth and have a promising future. Participants with a high-risk tolerance might invest in sector funds even though these mutual funds have the potential to double or lose your money. In this article, you will learn in depth about sector funds, along with the top sector mutual funds to bet on. 

Why Sector Funds?
A sector fund is a kind of mutual fund that makes investments in the securities of certain industries, such as infrastructure, FMCG, banking, telecom, FM and Information Technology (IT). In other words, sector funds focus exclusively on a single industry or area for your invested wealth. A pharmaceutical fund, for example, can only invest in the stocks of pharmaceutical companies, while a banking sector fund can invest in banks. The fund manager in charge places money in shares of firms that are performing well on the market. Investing in industries with strong maturation potential in the near future is the main goal of this type of investing.

If the timing of the investment is right, these funds could actually wind up producing a significant profit. Knowing when to enter and depart the fund is important. Investors should place their money in market segments where they have faith in or anticipate future growth. The major goal is to capitalise on the expansion of a specific business or area. The capacity of sector funds to shield you against risks specific to particular firms is another benefit. Investing in sector funds would ensure that a company’s poor performance wouldn’t have an impact on your portfolio, as opposed to purchasing individual equities. However, you must be certain of your reasoning for believing that a sector will perform favourably soon before you invest in a sectoral mutual fund.

Compared to diversified funds, sectoral funds bet on the performance of a specific sector, and hence they are inherently riskier. These funds can experience several cycles of ups and downs since they are cyclical. In the past, a few industries have frequently performed well while the same sectors were negatively impacted when the situation changed. One must be aware of the risk factors and the potential returns since investing is all about taking on extra risk to increase returns.

Given that most themes go through cycles, sectoral fund returns may be greater in the short term. On the other hand, these funds don’t perform consistently in the long run.

Sector-Wise Performance

Banking and Financial Services Fund
In addition to cooperative credit institutions, the Indian banking system comprises 93,913 rural cooperative banks, 1,574 urban cooperative banks, 56 regional rural banks, 27 public sector banks, 26 private sector banks and 46 foreign banks. The State Bank of India, ICICI Bank, Kotak Bank and HDFC Bank are a few of the key participants in this market. More than 70 per cent of the assets in the banking system are under the jurisdiction of public sector banks, leaving a relatively smaller portion for their private counterparts. As you can see in the table above, banking and financial service funds have been one of the top performers when compared to the benchmark index. When compared to the benchmark S & P BSE Bankex TRI, the banking sector funds have generated satisfactory returns given the turmoil times the global economy is facing. 

Infrastructure Funds
After a new government took office in the centre in May 2014, the infrastructure sector fund reached a turning point. The government has included Rs 169,637 crore in the Union Budget 2020–21 for the development of transportation infrastructure. From the above table, you can see that in the last one year the infrastructure funds’ category has outperformed its benchmark index by a good margin. This depicts not only the overall positive sectoral performance but also resembles the impetus given to the sector by government policies. Investors who are interested in this fund are urged to review the schemes’ last five years of performance along with their AUM (that should be more than Rs 100 crore). Not to mention, these funds are sector-specific funds, which carry a high level of risk.

Pharmaceutical and Healthcare Funds
The amazing bullish run witnessed post the first wave of the pandemic was very positive for pharmaceutical and healthcare stocks. With a robust network of 3,000 pharmaceutical businesses and over 10,500 manufacturing facilities, India has a well-established domestic pharmaceutical sector. Positive growth of 1.21 per cent over exports of USD 1977.76 billion in August 2020 brought the value of pharmaceuticals to USD 2001.78 billion in August 2021. In the above table, you can see that both the sectoral benchmark and the pharmaceutical and healthcare funds category have taken a beating.

This is mainly due to global equity turmoil and the slowdown of western economies. However, in the quarter from July to September 2022, the BSE Healthcare index increased along with the Sensex. Our sectoral prognosis is still optimistic, driven by the positive trends in the US generics market, the robust domestic formulations market, and lower freight and API prices. With consistent domestic business, successful launches in the US market, and continuing cost optimisation, we anticipate profitability to increase going forward.

Information Technology Funds
The Indian business norms are shifting as a result of the rapidly evolving Indian information technology sector. The global sourcing market in India keeps expanding faster. Having a share of 55 per cent, the nation continued to be the top sourcing location in the globe. By 2025, it is expected that India’s IT sector will have contributed 10 per cent of the GDP, up from its current 7.7 per cent share. Over a five-year period, technology mutual funds in India regularly offered an annualised return of 15 per cent to 19 per cent. These funds are anticipated to continue generating positive returns in the future due to their impressive historical performance. Ideally, investors should put money into this fund to diversify their portfolios. Investors who intend to invest in technology funds must pay special attention to how those funds have performed over the last three years.

One should be well-versed in the technology industry and its potential market. While the one-year trailing returns of both the benchmark and sector category have taken a beating, we do expect IT services to report uplifting revenue growth in the range of 2.5 per cent-9.5 per cent QoQ in the USD terms. We foresee that Large-Cap IT companies will post a robust comeback with 3 per cent to 5 per cent QoQ revenue growth. Depending on the type of business, Mid-Cap IT companies are likely to outperform the growth of large-caps.

Conclusion :
Sector funds are intensely targeted investments. As a result, it is crucial to understand these funds well before investing. Lack of sufficient research might result in losses since investors may not be able to pace the market and quit the funds in time to avoid losses. To secure the greatest returns with the smallest amount of risk, investors should focus on sector funds that are part of a booming sector or sectors that have continuously performed well. During the pandemic, the pharmaceutical and technological sectors performed strongly. When there is a large inflow of budgets into the infrastructure segment, banking and infrastructure funds do better than average. We have examined several sectoral funds' short-term performance, particularly those in the infrastructure, banking, and technology sectors, which have provided average returns between 17 per cent and 28 per cent over one to three years. While some industries, like healthcare and pharma and basic materials, are likely to prosper as the economy begins to revive, investors need to exercise caution due to the uncertainty caused by geopolitical unrest, spiralling inflation and rising interest rates. Hence our bet would be to stay invested in infrastructure and banking and financial funds.