What are sectoral mutual funds Should you invest in sectoral mutual funds

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The banking sector is expecting growth. There is potential in the auto sector. Pharma has lived its rally. The IT sector is a consistent performer. You must have heard statements like these. Some people prefer investing in a particular sector. Well, there are sectoral mutual funds to do that. But investment in sectoral funds is not for all. It’s a difficult game to crack. Let’s understand everything about sectoral mutual funds: • What is a sectoral mutual fund and how do sectoral mutual funds work? • Sectoral mutual funds simply mean investing in companies belonging to a specific sector. For example, an IT sector fund invests only in IT companies, a banking sector fund only in banks, and so on. • The performance of these funds depends on whether these underlying sectors are in a profitable cycle or in a loss-making cycle. For example, pharma sectoral funds had hardly performed in 4-5 years before Covid-19. But after Covid-19, pharma became one of the best-performing sectors. So the timing of investment matters a lot in sectoral funds. • What are the risks in sectoral funds? • 1) No diversification • Sectoral funds are exposed to companies from one particular sector; meaning that these companies will have a similar business model. If any sector-specific negative development occurs, then it will impact the returns of your entire fund. • 2) Timing the investment • As already explained, you need to get the timing right. If you invest by analyzing the past performance then it can be a wrong decision; what if most gains are already factored in and that is why the fund is among the best performers? You should understand the sectoral cycle properly to be able to time it. • 3) Long-term investment • When to invest in sectoral mutual funds is a difficult question. As such you cannot plan short-term investments in equities but the time horizon for sectoral funds is even bigger. You have to stay invested for at least 5-7 years depending on the sector in which you have invested. • Who should invest in sectoral funds? • If you are an active investor who understands the stock market, then sectoral funds are an investment for you. Such active investors may also figure out sectoral funds which perform well when the economy is down. That is how they can hedge their portfolio. • If you are a conservative investor who may find it difficult to see their fund returns in negative or range bound for a long-time, you should avoid it. Even if one is investing in sectoral funds, keep the allocation to just 5-10% of your overall portfolio. • Pro-tip: How to choose the best sectoral mutual fund? • 1) If a certain sector has an index fund or ETF available then you should invest in it instead of going for active funds. For example, the Nifty Banking index fund or Nifty Bees will be much better than any active banking financial services fund. • If you haven’t already, start your investing journey on Kuvera - your safe space to invest. Click on the link below to get started. • https://bit.ly/3JTbcJq

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