Mutual funds give themes a miss

Even education, financial services stocks are part of infrastructure funds.

Did you know that infrastructure funds can actually invest in IT companies, consumer durables and the like?

Here’s another one: Your equity mutual fund can actually invest 100 per cent of its corpus in debt and will not even inform you before doing this.

Surprising, but true. Read the offer documents of these funds. In clauses such as special consideration and investment pattern, a fund house can actually modify the theme to expand its universe of investible stocks and also change the scheme structure from equity to debt.

Take ICICI Prudential Infrastructure Fund. The fund’s offer documents state that it will invest in the infrastructure sector and debt instruments, “however, there can be no assurance that the investment objective of the plan will be realised.” And the fund’s portfolio shows that 10.70 per cent of the corpus has been invested in finance and banking companies.

“For us, infrastructure is a very broad theme. The fund can invest in any company that does not come under sectors such as markets (brokerages), FMCG, pharmaceuticals, IT, media, consumer and auto,” said Sankaran Naren, chief investment officer at ICICI Prudential Mutual Fund. He also manages ICICI Prudential’s infrastructure fund, which has a corpus of Rs 3,800 crore. He said narrow themes, or limited sectors coverage, could hamper investments for a fund that had a large corpus. “And for many fund houses, power and infrastructure funds are bigger than other diversified equity funds in their basket,” he added.

An industry observer said apart from banking and pharmaceuticals, mutual funds did not stick to their themes per se or the themes are defined to include a wider investible universe.

“This is because funds are not created because there is a strong investment case but because the themes can sell with investors,’ he said.

Sundaram BNP Paribas Energy Opportunities’ offer document says the fund will invest in any industry that consumes power. “Now tell me which industry does not?” said the observer.

Some companies do set definitions according to their classification of industries. Take the example of Taurus Infrastructure fund. The fund, with a corpus of Rs 12.31 crore, has Educomp (4.76 per cent) in its top 10 holdings. It has invested 1.09 per cent of its corpus in FMCG companies.

“Educomp is in the business of supplying educational content... With education and schools also classified as part of the infrastructure theme (social infrastructure), we feel Educomp classifies as an infra stock. In FMCG, we have Asian Paints and its products are used primarily in infrastructure (housing, buildings and so on),” clarified Waqar Naqvi, chief executive officer, Taurus Mutual Fund, through an email.

Broadening theme is essentially a lesson that mutual funds have learnt in the past, especially after the dotcom bubble burst. Many fund houses had then started an IT sector fund. When markets corrected, only a few companies survived. Mutual fund houses had to merge these funds with others. For instance, UTI Technology was made Services Industries.

Investment advisers said that thematic funds rarely made sense for investors and it was better for investors to put their money in a well-diversified equity fund.