How Long Should I Stay Invested in Sectoral-Banking Mutual Funds?

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Mutual Funds

Just like the capital invested, the interest rate, and growth potential, the duration for which you will stay invested also matters. But, on that matter, firstly comes your self-analysis. If your investment is to buy a car, you do not have to be invested for ten or twenty years. All you need to be invested for is a year to three. If your financial goal requires you to be invested for 6 months, you would invest in a liquid fund, if your goal wants you to be invested for 5 years you would choose a growth fund. But, if you choose to invest in Sectoral Banking Mutual funds – for how long will you be invested? Let’s find out.

What are Sectoral Mutual Funds?

A sectoral fund is an equity fund that invests investors’ money in businesses in the same industry or sector. These funds enable investors to gain exposure to specific areas of the economy by investing entirely in companies in the same industry.

Recently, SEBI’s reclassification has altered the foundation for determining whether an organisation is a Large Cap, Small Cap, or Mid Cap. Large Cap firms are those that rank among the top 100 in terms of market capitalization.

How Does a Sector Mutual Fund Work?

The Indian economy is made up of several industries such as technology, banking, pharmaceuticals, natural resources, and so on. Some of these industries may fare exceptionally well in the medium to long term. Sectoral funds are a type of investment vehicle designed to assist investors in capitalising on such possibilities.

Every equity mutual fund invests money raised from investors in company stocks. The main distinction between a sectoral fund and a mutual fund is that a sectoral fund invests its whole portfolio in equities of companies in the same industry.

A sector is essentially made up of related firms that offer the same type of product or service. Take, for example, the Technology Sector. It includes organisations like Infosys, Wipro, Tech Mahindra, Microsoft, and others. A sectoral fund targeted at investing in the Technology Sector, for example, will contain a portfolio of technology-related businesses. 

A Banking Sectoral Fund, on the other hand, will invest in companies such as HDFC, Kotak, Axis, Canara, and ICICI. It is not necessary for the Banking sectoral fund to invest in companies that only deal with finance in this case. It has a plethora of other choices for investment, such as small banks, NBFCs, and so on. That is, if you are interested to buy the Canara mutual fund, you will be buying a banking sector fund.

Furthermore, sectoral funds invest in firms of various sizes, from large-cap to mid-cap to small-cap, with the only requirement that they are in the same industry. Furthermore, SEBI requires all fund managers of sectoral funds to invest at least 80% of the fund’s total assets in equities and equity-related securities of a certain sector.

Why invest in Banking Sector Funds?

The main reason why you should invest in Banking sector funds:

You have a Good Possibility of High Growth

All sectors are not moving in lockstep with the economy. Sectors follow a cyclical pattern. They’ve got some nice ones and some poor ones. So, based on your research and analysis, you have a chance of making extraordinary returns by investing in sectoral funds if you can catch the correct cycle. 

During the early stages of the Covid disease, for example, many investors made excellent profits of more than 27 % on their investments in Pharma Sectoral Funds. Thus, only if the sector you believe in does well will your portfolio return be good, and it may even be greater than a fully-diversified fund.

Are you thinking, can I invest here? Here’s your answer.

Who is this for?

These funds invest in a single industry, and their lack of diversification makes them among the riskiest mutual funds accessible. As a result, only individuals who are willing to take on a high level of risk should consider investing in them.

If you’re a first-time investor – you shouldn’t dive directly into sector funds. Investment in sector funds necessitates precise timing of entry and exit, which even experienced investors struggle with. It is necessary to conduct extensive studies on the industry. Active investors who stay up to date on the latest news and headlines can make better predictions about which sectors will perform well. Even investors with a close working relationship with the sector will have access to insights that will help them make the most of their investment in sectoral funds.

Some industries, such as the automobile industry, are considered cyclical. As a result, investors with a high-risk tolerance for getting exposure in businesses at the bottom of their cycle can make a lot of money by investing in sectoral funds. A wise investor might invest in a sector that is at the bottom of its cycle and patiently wait for it to reach its top. They can promptly sell it as it hits its peak to book profits. Investing in sectoral funds so necessitates a certain amount of skill and patience.

Conclusion

The banking sector has never disappointed us – it is to date one of the best performing sectors worldwide. Though we have somehow physically stopped going to these banks, we are all connected to them. Making it the most essential of all.