Sectoral SIP Risks
Definition
Sectoral SIP involves investing in mutual funds that focus on a single sector — IT, Pharma, Banking, Infrastructure, FMCG, etc. While sectoral funds can deliver exceptional returns when the sector is in a growth phase, they carry significantly higher risk due to lack of diversification and cyclical nature of sectors.
In Simple Words
Sectoral funds are high-conviction, concentrated bets on one industry. When the sector booms, returns can be 30-50% in a year. When it busts, losses can be 30-50% too. Unlike diversified funds that spread risk across sectors, sectoral funds have nowhere to hide during sectoral downturns. SIP in sectoral funds is only for experienced investors with specific sectoral views.
Real-Life Scenario
Rahul started a ₹10,000/month SIP in an IT sector fund in January 2021: Jan 2021 - Jan 2022: IT sector boomed → Portfolio up 40% Jan 2022 - Jan 2023: IT sector corrected → Portfolio down 25% Net result after 2 years: Modest 8% return vs diversified fund's 15% His colleague Sita, investing the same in a diversified flexi-cap fund, earned steadier 15% returns because when IT fell, banking and pharma in her fund compensated.
Key Points to Remember
Frequently Asked Questions
Test Your Knowledge
1 questions to check your understanding
What is the maximum recommended allocation to sectoral funds in a portfolio?
Summary Notes
Sectoral SIP = high risk, high reward, not diversified
Only for experienced investors with sectoral understanding
Keep allocation below 10-15% of total portfolio
Use diversified funds as core; sectoral only as satellite