Monday, October 05, 2009

(October 2009)

All eggs in one basket…

Investing in just one sector or theme can prove fatal, especially, if the sector or theme runs out of steam and valuations have peaked. The fund manager in a thematic or sectoral fund is restricted by the fact that even if the sector does not do well the fund manager cannot take the liberty to invest in other sectors that are in vogue. There might not be enough companies in a sector or theme to populate an entire portfolio. For all their growth prospects, sector or theme funds perform only in patches.

Banking Funds
Back on the banks…

Banking funds registered a complete turnaround of fortunes, emerging as the best-performing category, after being the worst-performing category in the latter half of 2008. The monetary tightening by the RBI to arrest inflationary pressures adversely impacted the NAVs of banking funds in the first few months of the period under review. But the rate cuts and liquidity infusion to tide over the crisis, led to a boost in credit off-take. The banking funds’ performance was noteworthy because they managed to stay afloat despite the soaring inflation and interest rate fluctuations.

Technology Funds
In the limelight…

The performance of technology funds in the first half of the period under review was dismal owing to the cutbacks in technology spending, a fallout of the global financial crisis. With the rupee’s depreciation against the dollar and the recovery from the crisis, technology sector is back in the limelight.

Auto Funds

The auto funds have been lacklustre since the beginning of the period under review. Their woes have stemmed from the depressed passenger car sales, on account of higher interest rates, inflationary pressure, and fuel price hikes. Now, with interest rates and crude prices headed south, the auto sector has perked up. The growth in the auto sector in the long-term will be driven by the rising penetration levels of passenger vehicles in India.

FMCG Funds

Considered the most defensive of all funds, the FMCG Funds looked particularly attractive during the recent turmoil. The FMCG sector is poised for sustained growth over the medium to long term due to favourable demographics, low penetration, proliferation of modern trade channels, strong rural growth backed by higher agricultural incomes and the consequent increase in the purchasing power.

Pharma Funds
Far-sighted …

The category’s overall performance throughout the year has been better than its peers, having lost only 13%, which is much lower compared to other equity categories. This could be due to the fact that the pharma stocks did not participate in the runaway rally, and therefore, did not fall as sharply as the markets got hammered. India is a major destination for contract research and manufacturing services due to its low costs, skilled manpower, and manufacturing capabilities. Moreover, most pharma companies are cash-rich and do not need additional capital to grow. The long-term prospects of the pharma sector are indeed bright.

Infrastructure Funds
In vogue…

The infrastructure theme in mutual funds industry is like festivals in India. It recurs with predictable regularity to garner mixed response. In 2009, funds that play on infrastructure theme are back in vogue, because of the Budget’s emphasis on infrastructure. The Government has earmarked Rs 12,887 crore for urban infrastructure, an increase of 87% over the previous year.

PSU Funds
Flooding the market…

UTI Mutual Fund was the first fund house to launch a PSU Fund –UTI Master Growth Unit Scheme in 1993 (now UTI Top 100). There has been a fair amount of excitement about public sector stocks and funds in recent months. According to the latest Economic Survey, the Government should sell a minimum of 10% stake each in all unlisted PSUs, with a target of Rs.25,000 annually. The Government’s disinvestment plans have encouraged funds to launch PSU funds. Shinsei PSU Fund was launched recently. There are at least three PSU-focused mutual funds in the pipeline from Religare, Sundaram and SBI.

…crushes the nest egg

Every sector goes through its own business cycle. Sector funds could lose so much money during the downturn that they could forfeit all their gains of the upturn. Investment in a sector-specific fund is fraught with risks as any adverse effect in the business environment of the particular sector, can sting the investor. Divergence in returns is the hallmark of the sectoral funds – they can top the returns chart or sink to the bottom. Sectoral funds should always be used as add-ons to the already diversified mutual fund portfolio.

No comments: