A sector fund is a kind of mutual fund which invest in a particular sector or industry of the economy. The sector specific mutual fund such as banking funds, real estate funds are known as sector funds. A sector fund is more volatile and riskier than the other different type of market funds since their portfolio contains all the investments in a particular type of industry sector due to which they are less diversified, also their performance will be entirely based on the sector’s performance where they are investing. The level of risk of these funds depend on the particular sector. The main objective of a sector fund is to give the investors an opportunity to earn huge returns from a specific industry where they have a high growth potential. If an investor is looking for diversification among two or more asset classes, they can learn more about what is hybrid fund.
Sector funds can be characterized as:
1. Funds which focus on stock of a specific industry or business.
2. They are more volatile and riskier than the broad market.
3. Concentrated number of holdings i.e, investing entirely or mostly in a single sector.
A sector fund is suitable for investors who are willing to take aggressive risks. Often, investors choose these funds when they expect a 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. A sector fund is basically a mutual fund or exchange traded fund which concentrates their investments in a single sector of the market. A sector is a slice of the market which is focused on the same line of business.
There are a lot of organizations that have formally divided the market into different sectors and subsets. A sector fund will invest solely in businesses which operate in a particular industry or sector of the economy. Certain sectors offer high growth potential due to economically driven investing catalysts. The sector investing can also be a part of broad portfolio strategy with certain sectors offering characteristics that are applicable for specific portfolio allocations. A sector fund will have portfolio constraints that require a portfolio manager to choose investment securities for the fund that fall within fund’s targeted objective. A sector fund offers the advantage of diversification through different holdings in a portfolio. However, overall sector funds have risks which affect the entire portfolio because of their targeted sector exposure. Some sectors and sector fund investing may require a lot of comparisons than others. Certain sectors are also typically associated with market cycles. The consumer cyclical stocks include companies which are involved in automotive, housing, entertainment and retail activities. Companies and market sub-sectors do well when an economy is growing. Customer stocks involve companies which are involved in home utilities, food, beverage and household items and they are known to be more stable through all types of market cycles.
Swarali Chavan is a finance professor. In her free time, she reads upon and studies about market investment instruments. She has spent considerable time researching onsector fund. In this article, she has given an overview of sector funds.