ATK
New Delhi [India], November 25: Mutual funds are among the best and most accessible ways to invest in the stock market and get potentially high returns. While investing in mutual funds can be easier than investing in individual stocks, investors still need to understand the various types of mutual funds they can invest in, such as sector-specific funds, debt funds, liquid funds, hybrid funds, etc. In this article, we will focus on what sector-specific mutual funds are and how investors can choose the right sector funds for their investment portfolio.
What are sector-specific mutual funds?
Sector-specific mutual funds, also known as sector/sectoral mutual funds, are a type of mutual fund that invests primarily in companies belonging to a specific industry or sector. For instance, a technology sector fund will assign most of its assets to be invested in tech-related companies. Some examples of sector-specific mutual funds include tech funds, healthcare funds, defense funds, communications funds, finance funds, etc. Sector-specific funds can offer great returns when the industry or sector that they are invested in is experiencing a boom. On the other hand, they can also offer slower returns when the industry they are invested in is going through a downturn.
Choosing the right sector-specific fund
Here are some factors that you should look into when looking for the right sector fund to add to your investment strategy:
- Assess your risk tolerance: Sector-specific funds can be highly volatile as they are heavily dependent upon how the particular sector or industry is performing. If you do not have a high-risk tolerance, it is best to avoid investing in sector-specific mutual funds. Even if you choose to invest in them, try to do your research to determine which sector might experience breakout growth or get assistance from a financial advisor.
- Understand the sector: If you've decided to invest in sectoral funds like a healthcare fund, make sure that you do thorough research about the current and future state of the healthcare industry and stay up to date with all current happenings related to medicine, such as government policies, major investments and projects, etc.
- Consider past performance: Although past performance does not guarantee future results, it can be a good indicator of the reliability and performance of the fund over time. Avoid investing in funds with unstable or erratic returns and try to pick funds offering stable returns over a longer time horizon.
- Expense ratio: Another major factor to consider is the expense ratio. Once you have decided which industry to invest in, look at the expense ratio of the various mutual fund options. As a general rule, try to invest in a sectoral fund that offers a lower expense ratio, since a higher expense ratio can put a dent in your returns.
To conclude
Choosing the right sector-specific mutual funds may seem daunting for beginners. However, by focusing on a few fundamentals, such as your risk tolerance, deeply studying the sector/industry, and comparing the past performance of various sector funds, you can make an informed decision about which sectoral mutual fund to invest in.
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