Sector funds are those mutual fund schemes, which carry the mandate to invest in the companies working in the specified sector predominantly. Such funds invest a minimum of 80% in equity instruments of that particular sector. For example, a banking fund can help you have a focused investment in banking stocks. The fund manager looks for primary investing opportunities within that sector itself and has little bandwidth to invest beyond that sector. So, while mutual funds broadly help you in portfolio diversification, sector funds can help you with diversification within a particular industry. At the same time, they also allow investors to stay focused on the expected uptrend in a specific sector.
Since the investor needs to make the choice of the sector as well as the timing of the investment on the basis of the expected outlook for the industry, the sector funds may not be suitable for someone who has just started investing into the markets through mutual funds. However, they also allow the investor to have a focused and concentrated exposure into a particular sector, thereby allowing them to make the most of the investment opportunities available in that sector.
When you are investing in a diversified fund, the superior returns from one sector may be set off by the below-benchmark returns from other investments. On the other hand, if you are invested in a sector fund, you can be benefited from the run-up and growth in that particular sector. For example, stocks of companies associated with railway infrastructure often show a rally near to the budget, on the hope of increased capital expenditure in the sector, thereby leading to higher order book and revenue for the associated companies. Similarly, banking stocks tend to rally on favourable outcomes in the Monetary Policy Announcement and favourable outlook in terms of stressed assets. Even in the latest ended March 2019 series, while the benchmark S&P BSE Sensex has given returns of 5% during the month, the Banking Index has generated returns of 13% over the same period. (returns data may be checked independently as well) The investors can aim at capitalising on such opportunities by investing in sector funds.
Taxation of Sector Funds
With a minimum 80% equity exposure, sector funds provide you with access to preferential taxation regimen available to the equity oriented schemes. As per the Income Tax Act, equity-oriented funds are those funds, which invest 65% or more in equities and related securities. Further, the gains from such funds are categorised as long-term capital gains and short-term capital gains, depending upon the period of investment in such funds. If you have stayed invested in such funds for less than 12 months, the gains are taxable as short-term capital gains at 15% (plus applicable surcharge and cess). However, if you have stayed invested for a longer period, the gains are taxed as long-term capital gains @ 10% (plus applicable surcharge and cess). Further, long term capital gains from equity shares and mutual funds are also exempt from tax for up to Rs. 1 lakh every year.
Considering the relatively high risk involved in taking a focused exposure, such funds must not be the only schemes in your portfolio. Going with the principles of diversification, the portfolio must remain well diversified across the asset classes suiting the investors’ risk profile.
Disclaimers: The information set out above is included for general information purposes only and is not exhaustive and does not constitute legal or tax advice. In view of the individual nature of the tax consequences, each investor is advised to consult his or her or their own tax consultant with respect to specific tax implications arising out of their participation in the Scheme. Income Tax benefits to the mutual fund & to the unit holder is in accordance with the prevailing tax laws/finance bill 2017. Any action taken by you on the basis of the information contained herein is not intended as on offer or solicitation for the purchase and sales of any schemes of UTI mutual Fund. Please read the full details provided in SID and SIA carefully before taking any decision.
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