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What are Sectoral Funds?
A mutual fund that invests its assets in a particular sector, such as infrastructure, technology, pharmaceuticals, real estate, banking, etc is known as a Sectoral Fund. These funds predominantly invest in equities of companies from a particular sector. Since these funds, invest in one specific market segment, they tend to be risky.
As per the guidelines issued by the Securities and Exchange Board of India (SEBI), a sector mutual fund has to invest at least 80% of its assets in equity or equity-related instruments of the selected sector.
These funds are suitable for investors with high risk tolerance. Investors should diligently choose a fund whose selected sector is going to perform well in the near future.
What are Thematic Funds?
An open-ended mutual fund scheme that invests in a theme-oriented pattern that may comprise of multiple sectors. For instance, a particular thematic fund may invest in Energy oriented industries. This would include MNCs operating in the energy sector, Solar Power Plants, etc.
As per SEBI guidelines, for a fund to be classified as a thematic fund must invest at least 80% of its assets in the sectors related to a particular theme. Rest of the assets can be allocated to other equity, debt or money market instruments.
Characteristics of Sectoral/Thematic Funds
- High Returns
Sectoral mutual funds offer high returns on investment when there is hope for a market boom for that particular sector. If an investor does a thorough research and invests in a sectoral/thematic after proper analysis of the market scenario, s/he may get high returns on investment.
- Highly Risky
Sectoral funds tend to be highly risky. When one sector observes an economic slowdown, all the companies from that sector are affected with loss in revenue. At times like these, mutual funds investing in that sector deliver losses.
For instance, recently the automobile sector in India witnessed the worst crisis in the past 20 years. Funds which had allocated significant resources to this sector saw a sharp drop in their returns. UTI Transportation and Logistics Fund, which is a sectoral fund, saw losses above 30% in a single year
One can invest via Systematic Investment Plan (SIP) in these mutual fund schemes to mitigate the market risk to some level.
- Diversification
Thematic funds offer more diversification than sectoral funds. The former bet on a particular theme and capitalize on the good performance of the companies operating under that theme. Even if one sector of the theme doesn’t perform upto mark, the fund still manages to contain losses with high diversification.
Sectoral funds invest only in companies of a particular sector, which exposes them to losses during unfavourable market fluctuations in that particular segment.
Best Sectoral Mutual Funds to invest in 2020
Here is a list of top 3 sector mutual fund schemes provided by various Asset Management Companies(AMC) one can consider for investment in 2019:
- ICICI Prudential Banking and Financial Services Fund
As the name suggests, the fund has invested its assets in the banking and financial sector. If you look at the sector-wise allocation of the assets, the fund has invested about 91% of its assets in the financial sector.
With just 30 stocks, the portfolio of the fund looks pretty concentrated. However, the fund has invested the majority of its assets in large-cap (65.30%) which gives it a stable outlook in the time of market turmoil. The fund has also allocated around 23% and 11% in mid-cap and small-cap respectively.
The fund has returned over 10% returns in 3-year time frame while it has generated about 14.52% returns per annum in the last 5 years which makes it really attractive (as of September 4, 2019).
- Franklin Build India Fund
The fund invests in the infrastructure sector. However, if you look at the sector-wise allocation of the fund within the infra sector, the fund looks well-diversified. The fund has invested about 31% in the financial sector, 21% in the energy sector and another 15% to the construction sector.
With just 35 stocks in its portfolio, the fund has followed a concentrated investment strategy. The fund has allocated around 67% of its assets in large-cap, while investing around 15% and 18% in mid-cap and small-cap respectively.
It has delivered returns at a fairly good rate of 11.11% in the last 5 years (as of September 4, 2019)
- L&T Infrastructure Fund
This is another sectoral fund which has fared well in the past 5 years with annualised returns exceeding 8%. With consistent performance over the years, it has outperformed its benchmark and category average in all the 1-year, 3-year and 5-year return framework.
Around 38% of its assets have been allocated to equity and equity-related instruments of construction companies, along with 21% assets invested engineering segment.
This fund has almost equally distributed its assets among large-cap. Mid-cap and small-cap stocks. About 34% is invested in large-cap companies, and 34% and 32% in mid-cap and small-cap stocks. This investment strategy effectively mitigates market risk and captures the growth potential of mid-cap and small-cap businesses.
Best Thematic Funds to Invest in 2020
Here is a list of top thematic funds one can consider for investment in 2019:
- Aditya Birla Sun Life India GenNext Fund
The fund is a consumption-centric thematic fund. Interestingly, despite being a thematic fund, Aditya Birla SL India GenNext Fund has invested about 33% of its assets in the financial sector. The fund has invested about 24% of its assets in the FMCG sector and another 8% in healthcare.
The fund currently holds 63 stocks in its portfolio which makes it well diversified. It has invested around 60% of its assets in large-cap, and 34% in mid-cap and just 6% in small-cap which gives it a balanced outlook in terms of growth and risk.
It has delivered returns at the rate of 13.99% per year for the last 5 years which makes it quite attractive (as of September 5, 2019).
- Mirae Asset Great Consumer Fund
This fund is again a consumption centric thematic fund which has delivered annual returns at 12.31% in the last 5 years. The fund has allocated about 35% of its assets to FMCG sector while another 20% has been allocated to the financial sector.
If you look at the market cap wise asset allocation, it has allocated about 54% of its assets in large-cap, and 33% and 13% in mid-cap and small-cap respectively (as of July 31, 2019). Higher exposure to the large-cap sector makes the fund a relatively safer bet.
- UTI MNC Fund
This thematic mutual fund is concentrated around investment in equity or equity related instruments of multinational companies. These companies cater to goods and services in different sectors. Over 37% of the assets has been invested in companies dealing in consumer goods, and 20% in industrial manufacturing.
This fund has consistently delivered impressive returns, with more than 10% returns in the 5-year time period. It has allocated 48% of its assets to large cap companies which gives stability to the investment portfolio.
Things to Consider Before Investing in Sectoral/Thematic Funds
Sectoral/Thematic mutual funds are a high-risk investment instrument, therefore, it becomes imperative to choose a proficient and experienced fund manager while investing in these funds. One should carefully analyse the past year’s performance of the fund and decide wisely. Although past year records doesn’t guarantee best returns, it is one of the most important parameters while choosing the fund to invest in.
One should also remember that it will be better to have a diversified investment portfolio. So if you want to take a bet on sectoral/thematic funds, you should not invest all your assets in them, and choose different sectors for investment. This will add diversity to your portfolio, and reduce the overall risk.