Are you planning to invest in mutual funds? Have you decided the type of mutual fund you want to put your money in? Before you finalise, it’s a good idea to know about the different types of mutual funds in India. One such type is sector fund or sectoral mutual fund.
Let’s learn about the meaning of sector funds, thematic funds and the best performing sector funds in India, 2023.
What are Sector Funds?
Sector funds, also known as thematic funds, are mutual funds that invest in specific sectors that fit their fund’s investment goal. Sector funds can vary in their investment objective, market capitalisation, and class of securities within the portfolio. One particular sector of the economy can have large-cap, mid-cap, and small-cap shares.
As per SEBI regulations, sector funds/thematic funds must invest at least 80% in stocks of a particular sector or theme.
Sector funds invest in specific sectors like pharma, infrastructure, banking and transportation etc.
Best Sector Mutual Funds, 2023
| Name of Fund | Sector | Return | Expense Ratio |
| SBI Banking & Financial Services Direct Fund | Banking | High | 0.80 |
| Bank of India Mfd. & Infrastructure Direct Fund | Infrastructure | Very High | 1.06 |
| Baroda BNP Paribas India Consumption Direct Fund | Consumption | Very High | 0.79 |
| Quant Infra. Direct Fund | Infrastructure | High | 0.64 |
IT Sector Mutual Funds
These mutual funds invest only in one sector, which is the Indian information technology (IT) sector. Previously all IT spending was determined by the business cycles in the economy. But after the COVID-19 pandemic, due to the remote working and increasing trend toward digitisation, the IT sector is also moving closer to being a defensive sector in the economy.
The IT sector is one of the top earners of export earnings in India and comprises almost 7.7% of the total GDP of India. This contribution is expected to increase to 10% by 2025.
The top stocks in this sector include TCS, Infosys, Wipro, HCL Tech, Mind Tree, L&T infotech, Tech Mahindra, etc. Most IT sectoral funds hold these stocks.
Sector ETFs
Sector ETFs are pooled investment vehicles that invest in the stocks of a particular sector or segment of the market. This is generally represented by the benchmark index tracking the performance of a specific sector or industry segment. This represents a passive form of investing, as, in a sectoral ETF, the fund manager invests in all the stocks of the representative industry index as there are in the index itself, in the same proportion.
As there is no active tracking and selection of stocks, sector ETFs have a very low expense ratio covering the normal operation costs such as brokerage, security transaction taxes, and stamp duty and exchange fees. If you are bullish on the investment prospects of a particular sector, sector ETFs offer the best route for obtaining exposure to that particular industry sector.
Thematic Funds
Thematic funds invest across stocks in different sectors but are linked by a common theme. An infrastructure-based thematic fund could invest in stocks from the construction sector, cement sector, steel sector, etc.
Similarly, sustainable investing could be a thematic investment. Under this theme, green companies could be the focus with investments made in environmentally friendly companies or socially conscious companies.
Thematic funds are more diversified than sector mutual funds as they are diversified across sectors but less diversified than investing in the broad market. These funds are structured to take advantage of the upcycle in particular themes in the economy or just the boom phase in the economic cycle. As there is more than the moderate risk in thematic funds, investors’ risk profiles must be more aggressive.
Sector Funds: FAQs
Sectoral mutual funds focus all their investments on the stocks belonging to one sector. Thematic funds invest across stocks belonging to multiple industries as long as they adhere to a common theme.
Sector ETFs have the lowest expense ratio as they do not have asset management fees but only charge for operational expenses.
Read more about Index Mutual funds.
