Monday, October 01, 2007


Sector Funds
Surfing on sectors …

Sector funds have a mandate to invest in just one sector. Currently there are nearly 40 sectoral schemes operating in the Indian Mutual Fund industry, catering to 7 sectors. The first sectoral scheme to be launched was way back in April 1994, by Apple Asset Management Company called Apple Goldshare. It was later taken over by Birla Mutual Fund. The scheme is now known as Birla MNC Fund. The latest entrant in this segment is Lotus Infrastructure Fund which is currently open for subscription. Indian Mutual Funds have funds focussed on banking, technology, FMCG (fast moving consumer goods), pharma, MNC and infrastructure, with the latter being more thematic than sectoral inview of the wider definition.

Banking Funds

The Indian banking sector is witnessing a fair amount of interest and activity.There are three banking funds today - Reliance banking, UTI banking and Benchmark Banking BeES. Lotus Banking Fund is to be launched soon. Five more Banking ETFs are likely to be launched in the near future, two from Kotak, two from Benchmark and one from Reliance.The reason is understandable-Benchmark's Banking BeES is a Rs 5,845- crore fund today. The banking funds have delivered eye popping returns - over 82 per cent over the past one year.The banking stocks picked up momentum after better 2006-07 fourth-quarter results and on expectation of no further hikes in interest rates by the Reserve Bank of India in the future. Of course the fund managers are waiting to read the contours in 2009 when the banking sector will be opened up. In view of the restrictions, foreigners are currently investing through bank ETFs.

Technology Funds

In the past, particularly during the TMT (technology/media/telecom) boom in 1999-early 2000, there was a flood of sector funds targeting the technology/software sector. While some of these sector funds had their place under the sun, most of them were caught wrong footed when the market rally ran out of steam in March 2000. As Technology funds slipped into the morass, seven survivors of the tech melt down rose like a phoenix from the ashes… Magnum IT, DSPML Technology, ICICI Prudential Technology, Birla Sun Life New Millennium, UTI Software, Franklin Infotech and Kotak Tech. Reliance Mutual Fund came up with Reliance Media and Entertainment Fund in 2004. Now the appreciating Rupee does seem to have hit the technology sector but it …ranks next only to banking and infrastructure funds.

FMCG Funds

Though the outlook for the FMCG sector remains bright given the growth in consumer spending and better results posted by the companies, the funds in this category have put up a dismal show on the returns front. The three funds in this category by Prudential ICICI, Franklin and SBI could pull out a return of only 10.45% over the past 12-months, and has, in fact, lost 2.63% in the past six-month period. The sector in general is suitable for investors with reasonable risk appetite and will provide decent returns in a consistent manner over long duration.

Pharma Funds

The health of pharma funds has never been as robust as other equity fund categories. However, these funds' relative performance among the universe of equity funds have improved over the past one year. Among the five funds in this category, the latest entrants, JM Healthcare Sector and Reliance Pharma, both launched in mid-2004, have dished out the best returns over the past one year. Among the older pharma funds, Magnum Pharma has been putting up a better show. With the deadline for complying with international norms coming closer, the removal of controlled price regime should augur well for fundamentally good and competitive firms in the sector. This sector is essentially for the investors who have a reasonably long investment horizon, as this sector will perform in fits and starts and the steady growth will be visible only in a longer duration.

Auto Funds

Automobile stocks seem to be losing steam in the recent past. UTI Auto and JM Auto, both launched in 2004, have been languishing at the bottom of the returns chart. The category has managed to achieve an annualised return of only 18.24% over the past two-years and has, in fact, lost 7.38% in the past six months. However, the performance of the two funds remain wide apart. While, JM Auto, which has a mid- and small-cap orientation, has delivered a decent return of almost 31% over the past one year; UTI Auto, with its predominantly large-cap orientation, managed only 4.28%.

MNC Funds

All mutual funds will feel the crunch as the number of MNCs decreases. But more so, MNC-specific funds like Birla MNC, Kotak MNC and UTI MNC. These three funds were launched in 1998-2000, when MNCs were doing well. Now, with an increase in the number of firms being delisted, their investment universe is restricted. There are about 60 companies, where the public shareholding is less than 25 per cent and another 22 companies where action in the form of buy-back, open offer or voluntary delisting can be expected in the coming months. Though the MNC funds will benefit from the buyback, they will have to exit from lucrative stocks and see their pie shrink.

The Infrastructure Funds

Three of India's top five performing funds in 2006 were pure infrastructure funds. Strong order-flow and increased policy and budget support from the Government augur well for earnings growth of companies in this space. Reliance Diversified Power Sector Fund, ICICI Prudential Infrastructure Fund, DSP Merrill Lynch T.I.G.E.R. Fund, JM Basic Fund (Energy), Birla Infrastructure Fund, UTI Infrastructure Fund, Tata Infrastructure Fund, Principal Infrastructure and Service Industries Fund, Sahara Infrastructure Fund, UTI Petro Fund, Can Infrastructure etc. are relatively new funds with only Tata and DSPML Infrastructure Funds having been in existence for at least two years. Most of the infrastructure related sectors in India, while offering tremendous scope for growth in the medium to long term, are plagued by several roadblocks including land acquisition, political interference and lack of concerted action backed by a clear vision.These problems are likely to prevent the sector from reaching its real potential within the next 2-3 years.

…an adventure worth it?

Whether it was the technology sector in the late 90s or the banking or infrastructure sector lately, sector funds have always caught investor’s fancy. In addition to returns, long-term approach, understanding the sector dynamics, non-expectation of extraordinary returns and risk tolerance capacity should be the watchwords of those who want to surf the sectors and make a killing!

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