Sectoral Mutual Funds to Watch in 2024: Pharma, IT, and Beyond

In the fast-evolving world of investing, sectoral mutual funds have become a popular choice for investors looking to capitalize on specific industries poised for growth. Unlike diversified equity mutual funds, which spread investments across various sectors, sectoral mutual funds focus on particular industries, offering concentrated exposure to high-potential sectors. As we step into 2024, several sectors are catching the eye of investors, particularly Pharma, Information Technology (IT), and a few others that are set to outperform in the coming years.

In this blog, we’ll explore the potential of sectoral mutual funds, dive into key sectors like Pharma and IT, and examine other promising sectors that could drive substantial returns in 2024.

What Are Sectoral Mutual Funds?

Sectoral mutual funds invest in stocks of companies within a specific sector or industry. These funds offer high-reward potential but also carry a significant level of risk due to their concentration in one sector. If the sector performs well, investors can benefit from outsized returns. However, poor performance in that sector can lead to steep losses. Therefore, sectoral funds are best suited for seasoned investors with a high-risk tolerance.

Why Consider Sectoral Mutual Funds in 2024?

Several factors make sectoral funds appealing in 2024:

• Economic Cycles: Different sectors perform well during different stages of the economic cycle. Understanding where we are in the cycle helps identify sectors that will thrive.
• Government Policies: Specific industries may benefit from favorable regulations, tax breaks, or incentives. In India, sectors like Pharma and IT are set to benefit from policy shifts.
• Global Trends: Tech adoption, healthcare advancements, and climate change are driving growth in industries like IT, Pharma, and renewable energy, creating investment opportunities in these sectors.

With these factors in mind, let’s look at the sectors that are positioned for success in 2024.

1. Pharmaceutical Sector: The Lifeline of the Future

The pharmaceutical sector is one of the most promising industries for sectoral mutual fund investments in 2024. The Covid-19 pandemic has redefined the healthcare landscape, leading to increased demand for medical innovation, drug manufacturing, and research & development (R&D). As a result, pharmaceutical companies have seen their revenues soar, and the trend is likely to continue well into 2024 and beyond.

Why Invest in Pharma Mutual Funds in 2024?

• R&D Focus: Increased spending on research and development is driving the launch of new drugs and treatments, boosting profitability.
• Government Support: The Indian government has announced various initiatives such as the Production Linked Incentive (PLI) schemes, which will benefit pharma companies.
• Aging Population: Globally, the aging population is leading to a growing demand for pharmaceuticals, medical devices, and healthcare services.
• Covid-19 Boost: Ongoing demand for vaccines, antiviral drugs, and diagnostics will continue to support growth in the pharma sector.

Top pharmaceutical mutual funds to watch in 2024 include SBI Healthcare Opportunities Fund, ICICI Prudential Pharma Healthcare & Diagnostics Fund, and Nippon India Pharma Fund.

2. Information Technology (IT) Sector: Powering the Digital World

The IT sector has been a consistent performer over the past decade, and it continues to shine as a top choice for sectoral mutual funds in 2024. With the growing reliance on digital infrastructure, cloud computing, artificial intelligence (AI), and automation, IT companies are well-positioned to deliver strong returns. Moreover, the push towards digital transformation post-pandemic has further boosted the sector’s growth trajectory.

Why Invest in IT Mutual Funds in 2024?

• Global Demand: The demand for IT services continues to rise, driven by businesses undergoing digital transformations, increasing reliance on cloud computing, and the adoption of AI.
• AI and Automation: Companies focused on AI, machine learning, and robotic process automation (RPA) are witnessing tremendous growth, providing ample opportunities for mutual fund investors.
• Software and Cybersecurity: As companies shift to cloud-based solutions, the demand for software-as-a-service (SaaS) platforms and cybersecurity solutions will continue to expand.
• Offshore Business Opportunities: Indian IT firms have benefited significantly from global outsourcing trends, with countries like the U.S. and U.K. increasingly relying on Indian companies for IT services.

Investors can consider sectoral mutual funds such as Tata Digital India Fund, ICICI Prudential Technology Fund, and Aditya Birla Sun Life Digital India Fund for exposure to the IT sector.

3. Banking and Financial Services: A Rebound in 2024

Banking and financial services is another sector to watch closely in 2024. After facing challenges during the pandemic, this sector is poised for a significant rebound as the global economy recovers. Strong credit growth, rising interest rates, and an uptick in consumer spending are expected to benefit banking and financial companies.

Why Invest in Banking Sector Funds in 2024?

• Credit Growth: Rising consumer and business loan demands are boosting the profits of banks and NBFCs (Non-Banking Financial Companies).
• Higher Interest Rates: Rising interest rates tend to improve net interest margins for banks, thereby increasing profitability.
• Fintech Growth: Fintech innovations and digital payments are transforming the banking sector, offering additional growth opportunities for financial services companies.

Some notable funds in this space include HDFC Banking and Financial Services Fund and SBI Banking and Financial Services Fund.

4. Renewable Energy: The Future of Sustainability

As the world transitions to clean energy solutions, the renewable energy sector is rapidly gaining momentum. Governments worldwide are pushing for a shift from fossil fuels to renewable energy, which includes solar, wind, and electric vehicle technologies. This sector is ideal for investors looking for long-term sustainable growth.

Why Invest in Renewable Energy Mutual Funds?

• Government Incentives: Governments are offering tax credits and subsidies for renewable energy projects, providing a significant boost to the sector.
• Energy Transition: The move away from fossil fuels to cleaner energy sources is inevitable, and companies in this space are positioned for strong growth in the coming decade.

ICICI Prudential Green Energy Fund and Quantum India ESG Equity Fund are potential options for investors looking to tap into the renewable energy sector.

Conclusion: A Sectoral Approach for 2024

Investing in sectoral mutual funds can be a rewarding strategy for those who want to capitalize on high-growth industries in 2024. While Pharma and IT remain top contenders, sectors like banking, financial services, and renewable energy also present exciting opportunities. However, it’s essential to remember that sectoral funds come with higher risks due to their concentrated exposure, so thorough research and a clear understanding of market cycles are crucial.

As you build your portfolio for 2024, consider diversifying across different sectors to mitigate risks while capturing growth from the industries set to thrive in the coming year.