Sector funds are a type of mutual fund investment that focuses on investing in companies from a specific sector or industry, such as healthcare, technology, defence, etc. Sector funds can be a great investment and offer healthy returns when chosen carefully. However, for beginner investors, it can be difficult to identify and choose the right sector fund that will offer good returns. While it is not possible to fully predict the performance of these funds, there are a few important factors that investors can look at. Thus, in this article, we will take a look at some key indicators that investors should consider while choosing and comparing which sector fund to invest in.
Historical performance
Although historical performance is not a guarantee of future results, understanding the returns offered by various sectoral funds can help you gauge their potential. One of the key points to look at is how a specific sectoral fund performs during different market conditions, which will give you an idea of how secure/stable it is. It can be a good idea to compare the returns of sectoral funds over different tenures such as 1-year returns, 3-year returns, 5-year returns, and so on.
Expense ratio
Another major factor to keep in mind while comparing sectoral funds is the expense ratio. The expense ratio is the annual fees charged by the fund house to cover operating and management costs and can range between 0.5% to 2.5% of the funds’ value. As a general rule, financial experts recommend that investors should opt for mutual funds offering lower expense ratios since higher expense ratios will reduce the returns.
For instance, if a sectoral mutual fund is offering 12% returns but has a 2% expense ratio, your actual returns would only be 10%. On the other hand, a mutual fund offering 12% returns with an expense ratio of 0.5% will offer actual returns of 11.5%.
Assets Under Management (AUM)
AUM or Assets Under Management for mutual funds refers to the total value of assets that the fund manages. Mutual funds with a larger AUM are preferable as a large AUM indicates that the fund is more trusted among investors and is likely to offer better stability since they are managed by well-established fund houses. Moreover, sectoral mutual funds with higher AUM offer better liquidity, so you can withdraw your investments easily.
Fund manager’s experience
It is also advisable to look into the experience of the fund manager in charge of managing a sectoral fund. A fund manager with a strong track record of managing sectoral funds with good returns can be a positive factor in helping you choose the right fund. You can usually find information about a mutual fund manager on the fund house’s official website.
To conclude
Some key factors to look at when comparing sectoral funds include historical performance, liquidity, AUM, expense ratio of the fund, and the fund manager’s experience. Apart from the factors mentioned above, you can also take a look at the exit load of mutual funds, the experts’ outlook on the sector, and dividend returns for funds. By keeping all of these important factors in mind, you can compare and choose the right sectoral fund that suits your investing strategy.
