Truth About Sectoral Funds

That the mutual fund industry has belied the hopes of investors would be stating the obvious. For today, notwithstanding the government sops, nobody is chorusing "comeback with the sensex" anymore.

And fund managers, unlike their counterparts abroad who beat the indices regularly to give investors their due, are shifting their attention from diverse portfolios to a uniform one. The result: Funds dedicated to specific industries and sensex.

Is it the answer to the prayers of the fund managers? Will that help the investors to corner some dough? Or, as with all fads before, once the initial euphoria wears thin, would they realise the lightness of their purses? "It is nothing new," says Gul Tekchandani, chief investment officer, Sun F&C Asset Management. "

 

The world over you have such niche funds. And in India the emerging infrastructure sector is the sole reason." Indeed, the huge investment requirement, long gestation period, and your faith in the project would see such funds blooming in a big way.

First, a survey of the scene is in order. Today, you have two funds already, from ICICI and Tata, floated specifically for the core sector. As for the future, you will have some more. JM Finance is planning schemes that will invest exclusively in petrochemicals, sensitive indices of both the Bombay Stock Exchange and National Stock Exchange and infrastructure sectors. Unit Trust of India and HDFC are planning real estate funds; the former also has plans for a commodity fund.

Niche funds: Welcome to the world of sectoral funds. As the name suggests, these funds are meant for investing in a specific sector. And so far, they are mainly industry specific, or sensex. If you think there are not enough, wait for some more time to see them gracing your portfolio.

Investors who do not want a wide basket can identify any particular industry and invest in a fund that is dedicated to it," says Tekchandani. "If they are convinced that such a dedicated fund can beat a broad-based portfolio," adds SC Bhatia, chief, ICICI asset Management.

The point is: For one, if you are bored with having a conventional, diverse portfolio, then you can try this one out. Consider, for instance, your investment portfolio. You have a mix of equity, debt, liquid money, etc. Now you are extremely bullish about infrastructure. This is where these niche funds come in. Again, if

you are positive about, say, power, then you can bet on a `power fund.

Cost factor: In short, niche funds give you an opportunity to narrow down your focus, that too, at a minimum price.

For instance, ICICI offer document says that if you were to buy all the sensex scrips in the BSE, it will cost you Rs 5.5 lakh. That is when you buy the minimum lot of each share. But for the accurate weightage you should pay

Rs 23 lakh. How would you like

to buy sensex scrips for a fraction of that money?

Second, it gives your fund manager more scope to plan his strategy thanks to the homogeneity of the portfolio. Unlike normal mutual funds, where the disparate portfolio pulls at different directions, here the small size of the scrips may not dwarf your fund manager.

Is it all easy then? You go by your instinct, right? For example, every other day you hear that the prices of property are going up in many places and have not let up at all, and you bet on a real estate mutual fund. Then someone tells you that infrastructure projects with government patronage is too good to miss; you put in money there too.

Then comes the lure of sensex, and bingo you go. So on and so forth. Is that the way you are planning to go about?

If so, you better had watch out. Check the NAV of ICICI Power, a fund dedicated to the core sector. Or say, Tata Power. For example, the NAV of ICICI power stands at Rs 7.67.

How about that? Bhatia defends that "the fund was ahead of its time." However, the fund has

a lock-in period of seven years and he is hopeful that by that time he will make it.

Safety angle: Yes, these funds are indeed sector specific. And

a shade safer. But that doesn't mean that you can bet on them blindly

For instance, do you know anything about petrochemicals industry? That a small development anywhere in the globe may have its impact on the industry. And the industry cycle is of three long years? Or have you noted that JM's fund has a lock-in of three years? That the price fluctuations are extreme here?

If the answer is no, you better gather the answer before you blame "that mutual fund guy" who blew it up.

Fund managers ask investors to be clear about their goal (See table). Firstly, if you are a small investor, don't put your entire savings in one fund. Like your normal investment portfolio, keep it as diverse as possible. And keep reminding you that equity is risky.

Understand the concept before betting on it. For instance, it is very crucial to understand sensex before betting on a sensex fund. It hardly matter whether the sensex coursed peaks, what matters is your entry and exit points. One fund manager informs that "the sensex level is the same for the last four years." That would mean if you had bought units of a sensex fund four years ago and were to get out today after four years, your will not corner much money at all.

"Before getting in, satisfy yourself with facts as to why this sector would beat all others in a specified period," asks Bhatia. Pay enough attention to figures and statistics; convince yourself about the prospects of your choice industry. Pay enough attention to the business cycles of the industry. Mostly, the lock-in period of the fund could give you an indication about this factor.

The next step is to satisfy whether the fund has the necessary expertise. The track record of the fund would prove handy here. Read the offer document to find out about the portfolio, disclosure and service standards. Make sure that you are choosing a reliable fund. "After all, it depends a lot on the fund," avers fund managers. But frankly, assessing performance is going to be tough as most of them have been languishing for the last three years. Tough luck there.

Understand the concept See whether the fund has the required expertise Learn about the industry Note the cycles of the industry Check the lock-in period Don't put your entire money in a fund Balance your portfolio with different funds Core sector Petrochemicals Real estate Commodity Infrastructure Sensex