When the funds are invested exclusively or primarily in the shares of companies belonging to a specific sector of the economy, the investment is said to be in a sector fund. The sectors could be banking, FMCG (Fast Moving Consumer Goods), infrastructure, pharmaceutical, technology, etc.
Investor Choice
Funds are floated by Asset Management Companies that disclose the objectives upfront. It is for the investor to decide whether or not he should invest in a particular fund. Investors who expect a sector to surpass the broad market index would invest in that particular sector fund. Alternatively, an investor may select a specific fund only to hedge his overall portfolio investments. Thus, an investor who has limited portfolio exposure to energy shares may choose to invest in an energy sector fund. High energy prices are damaging for other sectors but beneficial to energy companies. The sector fund approach may also appeal to investors with high risk appetite.
Implications
These funds, by their defined approach, are high risk. It is tantamount to putting all eggs in one basket. If the sector performs well, the fund will deliver excellent results. Conversely, if that sector suffers a down turn, the investors will have reason to regret their decision. There being no diversification in the investing pattern, the high risk-high reward feature is inevitable.
Nice article by Randolph !!! Though the investors are thrilled with certain sectors as they foresee them as prospering or fast progressing fields, writer has certainly pointed out valid fact.The investors may get higher rewards but the risk magnitude is equally higher for such sector funds.Hence , the risk averse investors may prefer such sector funds , but cautious investor may stay away owing to lower risk appetite.