Investment advisors favour IT, pharma funds

But fund managers recommend that investors stick to diversified or large-cap funds

Take a look at the performance of mutual funds through the last five years; you will notice pharmaceutical and information technology (IT) funds have been among the best-performing ones.

According to Value Research, in the past year, IT funds have returned 27 per cent, while pharma funds have returned 16 per cent. In the last two years, while IT funds returned 21.5 per cent, pharma returned 17.5 per cent. IT funds returned 8.5 per cent in the last three years and 11 per cent through the last five years, while pharma funds returned 14 per cent and 19 per cent, respectively.

Add to that the fact that the rupee depreciated about 20 per cent this year. Also, a recovery in the US economy might boost revenues in the IT and pharma spaces, as most companies in these sectors are driven by dollar revenue. Given the current market conditions, investment experts believe these segments could help cushion the impact of the current slowdown and the fall in the rupee. Therefore, many of them suggest investors include IT and pharma funds in their portfolios.

“There is scope for good returns in these two sectors because the rupee may depreciate further. If investors do not have these two sectors in their fund portfolios, they should include these. Those with small holdings could look at increasing their exposure,” says a fund manager at UTI Asset Management Company.

Most fund managers say this advice holds good only for savvy investors and those with high risk-taking ability. Sankaran Naren, chief investment officer (equities) at ICICI Prudential Asset Management Company, says, “Defensives do look attractive, but only in the near term. It is because the economy is weak that these businesses look good. Otherwise, I would not advise investing in sector funds.”

This is primarily because these two sectors have outperformed the broader markers significantly, and from the current levels, one doesn’t know in which direction these would head. The rupee would largely determine the direction, says Ramanathan K, chief investment officer, ING Investment Managers. He adds considering the government and the Reserve Bank of India are keen to rein in the rupee’s fall, from here, the upside might not be substantial.

He feels there is a case for investing in IT more than in pharma, as the IT valuations are reasonable and price/earnings ratios are attractive. Most pharma companies have huge foreign debt on their balance sheets, and this could offset gains due to currency depreciation. Comparatively, most IT companies are debt-free and sitting on cash piles.

A few experts feel it wouldn’t be right to increase sectoral exposure, as this would amount to timing the market. Instead, investors should stick to funds that have done well consistently and have exposure to IT and pharma sectors, they add.

Vetri Subramaniam, chief investment officer, Religare Mutual Fund, agrees. “Individual investors’ primary portfolios should comprise diversified equity funds. These two sectors look good at this point, but benefits of the falling rupee aren’t restricted to these two alone. Companies from other sectors have also benefited from the depreciating rupee,” he says.

Diversified or large-cap funds with exposure of up to 10 per cent in each of these two sectors should be enough to avail of the good performance in these segments.