Sectoral funds are equity funds that invest mainly in stocks of one specific industry. For example, a fund may focus only on the banking, IT, healthcare or automobile sector. The fund must invest at least 80% in equity shares of companies from that sector. The remaining amount can be invested in debt instruments like liquid funds or kept in cash to manage withdrawals.

Sector funds can perform very well when a particular industry is growing fast. For example, when consumer spending increases, FMCG sector funds can see the benefit, and IT sector funds may gain when global tech spending increases.

However, these funds also carry concentrated risk. If the particular sector falls, the fund can also fall sharply because it cannot simply move most of its money into another industry.

These types of funds suit investors who understand a particular industry and are comfortable with higher risk. You can consider them if:

• If you have a strong view on a sector: If you understand IT, EVs, defence, pharma, or any other industry well, then a fund dedicated to that sector can help you invest in its growth without picking individual stocks.
• If you are an aggressive investor: If you’ve already started your SIP in a diversified scheme like large cap funds, flexi cap funds, or index funds, then sector funds can become a small part of your portfolio.
• If you understand business cycles: Sectors such as metals, infrastructure and real estate can go through long ups and downs. If you understand these cycles, you can enter and exit at the right time.
• If you want extra exposure: A broad index may have a limited exposure to a sector you strongly believe in. A sectoral fund can let you increase your exposure to that area.

When you invest in an industry-specific fund, the fund manager picks and invests only in companies in that sector. They can choose large, mid-sized, or small companies, as long as they belong to the chosen sector.

For example, suppose you invest ₹10,000 in a banking sector fund. Here’s how your investment could split up:

Now imagine the RBI cuts interest rates, loan demand increases, and bad loans fall. If the banking sector enters a strong growth phase, the scheme can perform well. If the NAV grows by 10%, your ₹10,000 can grow to ₹11,000.

But the opposite can happen too. If loan defaults rise or new regulations hurt banks, the fund value can fall. And since the scheme cannot simply shift to another sector, your investment remains exposed to the banking sector.

There are many types of sectoral funds to invest in India. Here are some common types:

• IT Sector Funds: These funds mainly invest in tech-related companies and can benefit when global tech spending is strong.
• Banking & Financial Services Funds: These invest in banks, NBFCs, housing finance companies, broking firms, and the like. Their performance depends on India’s credit growth.
• Pharma & Healthcare Funds: They invest in drug manufacturers, API exporters, diagnostic companies, and other healthcare businesses. Their demand can remain stable even during weak economic periods.
• FMCG Sector Funds: These funds invest in companies selling everyday products such as food, beverages, and personal care products. These businesses generally have steady earnings.
• Infrastructure Funds: They invest in cement companies, road developers, ports, and capital goods businesses. Their performance is linked to government spending and economic growth.
• Automobile Funds: These funds invest in car makers, commercial vehicle companies, two-wheeler companies and auto component manufacturers. They can benefit when consumer income rises, interest rates are cut, and rural demand improves.

• Direct exposure to a specific industry: Sectoral funds give you better exposure when there’s a strong move in one sector. Diversified schemes like multi cap funds and large and mid cap funds offer only limited benefit.
• Flexibility within the sector: The manager can invest in large, mid, and small caps from the same industry. This gives you exposure to different types of companies within that sector.
• Professional stock selection: Finding the IT company that could benefit from a new technology can be difficult. The sectoral fund managers thoroughly research the industry to pick the best stocks for you.

Here are some sectoral fund-related risks worth knowing:

• High concentration risk: Your money is heavily concentrated in one sector. If that sector faces problems, the fund can fall sharply.
• Cyclical risk: Some industries are cyclical, meaning they do well for a period and then stagnate for some time. If you invest near the top of a cycle, you may have to wait several years for a recovery.
• Timing risk: Sector funds need more attention than diversified funds. Entering too late or failing to exit when a sector becomes expensive can hurt your returns.
• Regulatory risk: Government decisions on prices, exports, and taxation rules can affect an entire industry at once.

Sector funds and thematic funds may seem similar, but they aren’t. Here are the important distinctions worth knowing:

If you like focused investing but want exposure to more than one sector, then you can also explore schemes like value funds, contra funds, or focused funds.

The best sectoral mutual funds for you may not suit others, and vice versa. Here are factors you should look for to pick the right scheme for your needs:

• Look for early-cycle sectors: Find the sectors that may have been weak or flat for a few years but are now showing signs of improved earnings.
• Keep costs low: Lower annual costs, like expense ratios, can help your returns compound better over time. A direct plan generally has lower costs than a regular plan.
• Check what’s in the portfolio: Even within one sector, the scheme should not depend too heavily on one stock. Also look for a portfolio that is spread across companies of different market caps.
• Verify the fund manager’s track record: Sectoral investing needs strong research. Look for a mutual fund that has an experienced manager who understands the industry and has consistently performed well.
• Invest a small portion and have an exit plan: Don’t invest too much in sector funds. A 10%-15% exposure helps limit risk. Also, plan your exit before investing, as sector funds are not necessarily meant to be held forever.

For a balanced diversification of your portfolio, you can invest the remaining amount in blue chip funds, Nifty Next 50 funds, or multi asset allocation funds.

Starting an SIP in sectoral funds through Millions takes just a few moments:

• Install the Millions app from Google Play Store or iOS App Store.
• Enter and verify your mobile number and complete KYC to register.
• Browse the curated list of mutual funds and choose your preferred sectoral fund to invest in, such as pharma, IT, auto, etc.
• Tap on SIP and select a daily, weekly, or monthly schedule.
• Enter your investment amount, select the deduction date, and make the first payment.

And you’re set! Remember, unlike diversified schemes, these mutual funds do not spread your money across many industries. Industry-specific funds work best as a smaller part of your portfolio. Build your core investments first, start small, and allocate some money to safer schemes such as debt funds or hybrid funds.