Sector mutual funds are those mutual funds that restrict their investments to a particular segment or sector of the economy. Also known as thematic funds, these funds concentrate on one industry such as infrastructure, banking, technology, energy, real estate, power heath care, FMCG, pharmaceuticals etc. The idea is to allow investors to place bets on specific industries or sectors, which have strong growth potential.
These funds tend to be more volatile than funds holding a diversified
portfolio of securities in many industries. Such concentrated portfolios
can produce tremendous gains or losses, depending on whether the chosen
sector is in or out of favour. Sectoral mutual funds come in the high
risk high reward category and are not suitable for investors having low
Generally, mutual fund houses avoid launching sectoral funds as they are
seasonal in nature and do well only in cycles. Since these funds focus
on just one sector of the economy, they limit diversification and the
fund managers ability to capitalise on other sectors, if the
specific sectors arent doing well. Unless a particular sector is
doing very well and its long term growth prospects look bright, it
advisable not to trade in sector funds.