Benefits and Risks Associated with Sector Funds

One of the many ways to invest in mutual funds is to park your money in a particular sector of the economy. This explains the name of the fund, which offers a chance of portfolio diversification. Another way of defining sector funds would be a stock, exchange traded or closed-ended fund that invests only in a specific sector or industry of the economy. So, while investing in a sector as per your knowledge can turn out to be fruitful, but at the same time an investor of sector funds should also stay cautious on the greater degree of risk it carries in case that sector witnesses a downturn.

Further, it would be wise to review the many benefits and downsides of investing in sector funds, before you put your hard earned money at stake.

Benefits of Investing in Sector Funds

It offers investor a chance to invest in a completely different sector, giving them the exposure that they lack.
When investor senses that a particular sector might do well and hence the performance of stocks will go up, they can consider a sector fund of for a particular individual stock.
If a company acquires new technology, the investor can instead of investing in the stock of the company can go with investing funds towards the technology sector that holds the company’s stock.
This gives an opportunity to profit from favorable fund in the sector that too while avoiding company specific risks.
It allows diversification between different sectors of the economy, thus we have assortment sectoral funds across multiple industries, which can acquire better returns than diversified equity funds.

Disadvantages and Risks of Investing in Sector Funds

As the fund is invested in only in a specific sector, the risk of getting affected is high.
Sector funds each year are both amongst the best and worst performers. Also, each year the position of the best performing sector funds change drastically. This clearly indicates high volatility that these funds are subject to.
Different sectors perform differently at various points in a given economic cycle. While some perform well in a bull market, others can do well even when the markets are not performing so well. This makes their past performance a non-reliable indicator.
Entering the market at the wrong time can again turn out to be riskier. Especially sub sector funds are trickier as compared to broader sectors, because of the narrow focus they have, which makes them prone to a risk in a given economic cycle.

Who should invest?

Those who work in that particular sector and have specialized knowledge of how it works. Though then that person is risking his own funds, as well as his salary in case the performances happen to be otherwise.
This fund is focused for those who aim aggressive growth, so you must invest in sector funds only if you feel you can bear the risk.
Investors seeking higher returns over time.