Last Updated On: 9/12/ 2011

B efore you start reading about sector fund I would like to tell you clearly that this is the riskiest category in mutual fund. Time to time few of the sectors have given phenomenal returns but end of the day losers are more than winners when we talk about investors. My suggestion is they should never be part of your core portfolio but depending on the individual you may think about this in your satellite portfolio. In this article I have covered what are sector fund, best sector funds, benefits & risk associated with them and finally should you invest in sector fund.

First understand what diversified equity mutual funds are. Diversified funds are the funds which don’t have any restriction on particular theme or sector. Or we can say diversified funds invest in different sectors like banking, information technology, pharma, power, FMCG etc. If I talk about Indian stock market it is divided into 56 broad sectors. So if you want to take advantage of entire market, you would look for a fund which is democratic when it comes to choosing a stock for the portfolio.

Let’s see sector allocation of a diversified equity fund. This is a large cap fund & you can see its top ten sectors – you can also see it’s comparison with nifty composition.

Now a classic example from a foodie. Once I was on a training to Hyderabad, and before going I was very happy as I thought I will eat only Biryani, which I was really fond of. Moment I landed in Hyderabad, I started my expedition of eating Biryani’s. I tasted Biryani at all places including the gali behind Char Minar and the thela outside the Salarjung. Although the training was supposed to be for 10 days, I had to rush back home on the 8 th day as I was sick and my throat caught an infection as I was eating too much of spices. Was I wrong? I was a Biryani lover and now if it is served in a buffet, I feel vomiting.

What is Sector Fund?

So now without even writing what are sector funds you must have guessed what these are? Sector funds are those funds which invest in particular one sector. Like funds dedicated to Information Technology or Banking. There is very low diversification as they are taking concentrated bets on a single sector or 2-3 main sectors.

Best sector funds

This is list of top 10 equity funds of last 3 years – total equity funds 383. (25 th May 2011) You can clearly see 7 funds out of 10 are sector fund or theme fund.