Mutual funds are funds pooled by investors and systematically invested in a mix of debt and equities, by experienced fund managers. There are different types of mutual funds that have a different portfolio mix along with the inherent risks and earnings potential.

Mutual funds have an inherent risk that is greater than fixed deposits (FDs) or savings accounts. Their returns potential is higher as compared to that from FDs and savings accounts.

There are a variety of mutual fund investment options available in the market, including but not limited to debt funds, equity funds, balanced funds, sector funds, and index funds. Every fund comes with its inherent level of risk and earning potential based on the mix of the underlying investment instruments.

Do you want to know what are sector funds? Below is a brief description of such funds.

Understanding sector funds
As an investor, if you were looking to invest only in a particular sector or industry, then the ideal instrument for you would be sectoral funds. Since all the underlying investment instruments in such mutual funds are from the same sector or industry, they tend to be riskier and more volatile than most other types of mutual funds.

The risk levels of such mutual fund investments are comparable to small cap, multi-cap, and mid-cap funds. While researching for the right investment instrument is a time consuming and technical task, the analysis of the findings thereof is even more complicated.

The research and analysis of sector funds are all the more complicated and requires an experienced and seasoned investor to understand the available options, compare them, and choose the right one for them.

While factors such as bank interest rate changes affect all types of mutual fund investments, they have a rather higher impact on funds focused on the financial sector like banking sectoral funds. In the same way infrastructure funds are highly affected by government spending and policies.

Finding the right tool to compare such vividly different funds and decide the right one to invest in, is one of the many difficulties that make investing and understanding what are sector funds highly challenging.

One of the frequently used tools to compare funds is the Sharpe Ratio. It enables you to compare funds, based on the marginal increase in the earnings potential of funds resulting from the increase in the risk of the fund.

Sharpe Ratio
Sharpe ratio is the average returns earned above the risk-free rate per unit of risk. A mutual fund having a higher Sharpe ratio is more promising than a fund with a lower Sharpe ratio.

A Sharpe ratio of 0.69 means, for every 1% of increased volatility the underlying fund will earn 0.69% higher returns.

The depth of technical understanding required to compare sectoral funds and choose the right one that aptly fulfills your financial dreams is a difficult and time-consuming task. The comparison of the options, in itself, is a complex task and a rather technical one. It involves an understanding of a rather wide variety of factors and the magnitude of their impact on different funds.

You add to the inherent risk of the mutual fund by relying on the advice of the professional. A person can be biased towards his perception of the potential of certain instruments. This may not be the ideal way for you to invest in sectoral funds. Being human, they are also prone to errors and the price of their errors would have to be borne by you in the form of delay in the achieving your financial goals or huge losses.

Not hiring a professional, leaves only one way out, and that is to manage your investments on your own. ARQ, the proprietary investment search engine from Angel Wealth will efficiently help you in carrying out the detailed and thorough research on the available investment instruments. As a core highlight of Angel Wealth’s mobile application, it carries out vast and in-depth research and presents the findings and reports for you in a simple and comprehensive manner. These reports and findings are free of any human bias and are entirely based on their past performance.

ARQ not only helps you choose the right instruments for your portfolio, it also helps you track the performance of your entire portfolio as well as every underlying investment instrument. With the machine recommended pointers from ARQ, you can make informed decisions on your portfolio and achieve your financial goals in a better and more efficient manner.