Definition: The Sector Fund is a kind of mutual fund that invests in a particular sector or industry of the economy. Simply, the sector-specific mutual funds such as banking funds, real-estate funds, etc. are called as sector funds.
The Sector Funds are more volatile and riskier than the other market funds as their portfolio contains all the investments in a particular type of industry sector due to which they are less diversified, and also their performance are entirely based on the sector’s performance in which they are investing. Thus, the risk level of these funds depends on the particular sector. The principal objective of sector funds is to give the investors an opportunity to earn huge returns from the particular industry sectors which have high growth potential.
On the basis of this, the sector funds can be characterized as:
- The funds which focus on a stock of a specific industry or business.
- More volatile and riskier than the broad market.
- Concentrated numbers of holdings, i.e. investing entirely or predominantly in a single sector.
Some of the commonly used sector-specific funds are:
- Banking funds: Here, the portfolio is mainly comprised of equities of different banks.
- Real-Estate Funds: The sector specific mutual fund that concentrates its investment in the real-estate companies.
- Pharma Funds: The portfolio containing the investments in the pharmaceutical companies.
- Technology Funds: The mutual fund that invests in the IT companies.
- FMCG Funds: Here the investments are made in the fast-moving consumer goods companies.
Thus, the sector funds are suitable for those investors who have an aggressive risk appetite. Often, the investors choose these funds when they expect the certain industrial sector to outperform the overall market. While some invest in sector funds with the intent to hedge or protect against the other holdings in the portfolio.