FUND FULCRUM
October 2010

The Average Assets Under Management (AAUM) of the mutual fund industry grew 3.7% to Rs 7.12 lakh crore in September 2010 as against Rs 6.87 lakh crore in August 2010 according to the data available from AMFI. Of the existing fund houses, 29 players managed to remain in the positive territory of growth in September 2010. Among the top five players, UTI Mutual Fund led the growth and added 5.37% more assets to its kitty, replacing Birla Sun Life Mutual Fund as the fourth largest fund in terms of AAUM. The assets of Birla Sun Life Mutual Fund grew 4.99%, followed by HDFC Mutual Fund and Reliance Mutual Fund which saw their assets increase by 3.25% and 3.1% respectively. ICICI Mutual Fund remained a laggard, with a growth of merely 1.39%.

According to the Association of Mutual Funds in India, the number of folios — including debt, balanced, and exchange-traded funds—declined by over a million during the first half from 4.81 crore to 4.71 crore. The number of folios indicates the number of investors in the fund market. It is a mix of high net worth investors (HNIs) and retail investors, with the latter accounting for a substantially larger portion. The average ticket size of folios, however, went up to Rs 1.51 lakh in September 2010 from Rs 1.44 lakh in August 2010, as assets rose in line with stock gains. The total number of folios in the industry as at April end 2010 was 4.78 crore. Folio numbers rose to touch 4.79 crore in June 2010. However, post-June, the industry saw a drop in folios month after month. July 2010 saw a decline of 1.6 lakh folios, and August 2010 49,723. The biggest drop of 5.8 lakh folios was recorded in September 2010. Primarily, these redemptions are because the stock market levels have consolidated at a high range, to 2007 levels. Secondly, the distribution channels are taking a while to adjust and settle down to the new game-changing regulations. Among the top five fund houses, except HDFC Mutual Fund, all others saw a dip in the number of folios. Reliance Mutual Fund was hit the hardest as it lost 226,000 folios, while ICICI Prudential Mutual Fund lost 106,000 folios. Birla lost half a lakh folios whereas UTI Mutual Fund saw a dip of 36,340. HDFC Mutual Fund added close to 300,000 folios. The loss is certainly a cause for concern. In September 2010, the equity segment saw a record net outflow of over '7,000 crore. However, the debt segment outperformed other categories and saw a rise of 624,000 folios to 43.6 lakh from 37.3 lakh at the beginning of 2010. UTI Asset Management Company holds the highest number of folios in the country, around 99 lakh. It also holds the highest number of debt fund (around 23 lakh) and equity fund (65 lakh) folios.

While high redemptions and net outflows on the equity side continue to be cause for anxiety, there has been good news from the Systematic Investment Plan (SIP) side. According to the data provided by the CAMS (MF registrar), SIP accounts have witnessed a whopping growth of 160% over the last year. In August 2010 alone, there were about 3.24 lakh new registrations (new accounts opened). An interesting sidelight, however, is the surge in SIP accounts in non-metros. The data show that new accounts opened in the non-metros have outpaced the growth reported in the five metros cities by a huge margin. The top 25 cities put together have opened more accounts, growing their count by about 188% to 1,18,113 at the end of August 2010. In comparison, only 95,403 SIP accounts were opened in metros. Not surprisingly, with non-metros adding higher accounts, the market share too is tilted in their favour. The share of non-metro accounts has surged from 33% seen last year to 36.5% now. Notably, that of metros has slid from 33% to 29.5%. Interestingly, there has also been a slight improvement in the average SIP ticket size. From about Rs 2,100 it has now moved to Rs 2,200.The other interesting observation has been the higher growth in the micro SIP segment (below Rs 1,000).The market share of this segment has moved up to 16% from 13% last year. Put together, the data clearly point towards the expanding influence of the equity cult. The higher share at non-metros can be attributed to the Government's decision to exempt investors whose annual investment is Rs 50,000 or less in SIPs from submitting details of PAN at the time of investment. It could also be reflective of the fact that distributors may now have started to look at SIPs as a more stable business model and perhaps may have started to market the same.

Piquant Parade

The board of Association of Mutual Funds in India (AMFI) has appointed Mr.U.K.Sinha as the Chairman and Mr. Milind Barve as the Vice-Chairman. Presently, Sinha is the Chairman and MD of UTI Asset Management Company, while Milind Barve is HDFC Mutual Fund’s Managing Director. Both Sinha and Barve would hold office till the next annual general meeting. Both have vast experience in the financial services sector and mutual fund industry. Sinha takes over the reigns from Mr. A.P. Kurian, who held the post since the formation of AMFI in 1995.

Sundaram Finance has bought out BNP Paribas' 49.9% stake in their joint venture Sundaram BNP Paribas Mutual. BNP Paribas recently acquired the financial services activities of the Fortis group. Since Securities Exchange Board of India regulations mandate that an entity cannot have a stake in more than one Asset Management Company (AMC), BNP Paribas was compelled to move out of its joint venture with Sundaram. Internationally, there will be no change in the equity platform. There might be some effect on the investments that are coming directly through BNP Paribas. Currently, the total business coming through BNP Paribas is to the tune of Rs 1,320 crore annually. The assets under management of Sundaram Mutual as on September 30, 2010 was Rs. 14,240 crore and the total number of folios is around 22 lakh.

Bharti Enterprises is in talks with Bank of India, the fifth-largest state-owned bank, to sell its 25% stake in the domestic asset management joint venture with AXA Investment Managers, paving the way for the bank’s re-entry into the 41-member local mutual fund industry, after it shut the business in 2004. Talks between the parties are in an advanced stage, but Bank of India wants a higher stake because of the network it would bring in. Bank of India, which has a strong presence in states such as Maharashtra and Gujarat, has about 3,200 branches across the country.

UTI Mutual Fund announced the launch of SIP investments (Systematic Investment Plans) through NSE's-the Mutual Fund Service System (MFSS) platform. Terminals of NSE brokers will be the official point of acceptance and hence the date of acceptance of the transaction will be the date of entering the request on the terminal. Investors will also have the added advantage of obtaining the same day's NAV (before 3 p.m.) at a large number of outlets in more than 1500 towns and cities, including remote locations. The investors will also have an advantage of getting their units allotted in demat mode in addition to the existing physical mode in accordance with their choice.

Regulatory Rigmarole

UTI Mutual Fund has permitted investment by Foreign National Individuals resident in India as per the provisions of the Foreign Exchange Management Act, 1999 and the Income Tax Act, 1961 of India, on a prospective basis, with effect from 18 October 2010.

The Securities and Exchange Board of India (SEBI) had directed portfolio managers to charge fees on profit calculated on the basis of the high water mark principle. For new client agreements, the above norms will be applicable from November 1, 2010 while for existing clients, the revised norms will be effective January 1, 2011. The regulator had on July 27, 2010 issued a consultative paper in this regard. The market regulator has also prescribed a standardised format of declaring fees and charges. Providers of portfolio management services are now expected to provide details of fees and charges under three scenarios — 20 per cent profit, no profit/no loss and 20 per cent loss — to all clients. This format enables a client to compute the indicative gain or loss on the funds he would be investing for a year. Portfolio managers should send a letter on the applicability of the ‘high-water mark' principle to clients and get their signature on the new fees and charges structure. New clients are required to sign a document declaring that they have understood the fee structure.

In the face of alleged violations in sale of universal life policies (ULPs), insurers would stop selling ULPs from October 23, 2010 till November 4, 2010 in accordance with a stiff direction by regulator IRDA. ULPs are basically hybrid products, having the flexibility of unit-linked products and traditional plans. At present, four companies Max New York Life, Aviva Life, Bharti Axa Life, and Reliance Life offer these plans. For protecting policyholders' interest, IRDA came up with guidelines for ULPs and sought life insurers’ views on the same till October 31, 2010. As per the draft guideline, IRDA has proposed a minimum life cover of Rs 50,000 or 10 times the annual premium for a customer below 45 years of age. For customers above 45 years, a minimum cover seven times the annual premium has been proposed. According to IRDA, the minimum policy term for such products should be five years and the lock-in period of three years. These products are to be linked to the savings bank account of a customer. The draft guideline says that a variable insurance policy would lapse if the customer does not pay premium for 12 months from the due date.

The asset management business in India is not as unprofitable as the mutual fund industry has sought to project, with fund houses nearly tripling their profits in fiscal 2010 - a year in which fund flows were impacted after distributors stopped selling some schemes. Total earnings of the 41 fund houses in India rose 284% to a record high of Rs 935.6 crore in the fiscal year ended March 2010, according to data from the Securities & Exchange Board of India (SEBI). Indian fund houses managed to boost their earnings by focusing more on a good mix of equity and debt assets and limiting costs, in a period that was marked by major regulatory changes. The securities market regulator had, last year, eliminated some marketing practices, including a ban on entry load which it believed was inimical to investor interest. In some cases, the regulatory hurdle on commissions has turned out to be a boon, as it brought down costs. In fiscal 2009, Indian asset management companies reported a profit of Rs 243.5 crore. The list of the most-profitable fund houses was led by Reliance Asset Management Company, followed by HDFC AMC, UTI AMC, ICICI Prudential AMC, and Birla Sunlife AMC in that order. But not all mutual funds are earning profits. Nearly 85% of the industry profits are accounted for by the top-10 players. Though many fund houses are still bleeding, their sponsors, including some of the biggest names in the global fund management business, have not wound up operations since India is one of the fastest-growing markets. India's 8.5% economic growth, which is the second-highest among major developing nations behind China, is expected to throw up many millionaires, according to a recent Capgemini-Bank of America Merrill Lynch report.

NFO NEST
October 2010

Mutual Funds had launched 26 new fund offers in the equity segment between November 2007 and January 2008. Today, the NAVs of half these schemes are below the face value of Rs 10 per unit. And, no scheme has an NAV of more than Rs 20. Given the huge rush at that time to participate in the equity market, these NFOs garnered a significant amount of money – Rs 21,205.40 crore. Reliance Natural Resource Retail mopped up Rs 5,660 crore, UTI Infrastructure Advantage Rs 3,500 crore, and HDFC Infrastructure Rs 1,720 crore. However, the combined assets under management of these schemes had dipped 32% to Rs 14,456.5 crore as on September 27, 2010. It could be because of redemption by investors and due to the inability of the stocks held to reach their previous highs.

Many fund houses seem to have learnt a lesson and are reluctant to launch new schemes. From the statistics available with the Association of Mutual Funds in India, between April and August 2010 the mutual fund industry witnessed the launch of only 10 equity NFOs. The collections were also not impressive at less than Rs 2,000 crore. The reluctance of the houses is also due to the fact that distributors are no longer pushing their products. Moreover, stricter guidelines introduced by the Securities and Exchange Board of India have tied their hands. To garner Rs 700-800 crore assets in a single scheme involves an expense of Rs 20-25 crore on promotional activities. If the fund house cannot recover this cost in two to three years, it will rather not launch a scheme. But Baroda Pioneer PSU Equity Fund - an open ended equity scheme – chooses to differ. It has received a favorable response from its investors and collected over Rs 1 billion during the NFO period.

IDFC Savings Scheme – Series I
Opens: October 15, 2010
Closes: October 29, 2010

IDFC Savings Scheme - Series I, a close ended debt scheme with the duration of 36 months, will mature on Nov.7, 2013. The scheme endeavours to generate income by investing in high quality fixed income securities as the primary objective and generate capital appreciation by investing in equity and equity related instruments as a secondary objective. The scheme will allocate 75% to 100% of assets in debt and money market instruments with medium risk profile. It will further allocate upto 25% of assets in equity and equity related instruments with high risk profile. Investment in securitised debt will be nil. Investments in foreign securities will be upto 50% of the net assets of the scheme. Investments in derivatives will be upto 50% of the net assets of the scheme. Benchmark Index for the scheme is CRISIL MIP Blended Index. The scheme will be managed by Ashwin Patni.

JPMorgan EEMEA Equity Off-shore Fund
Opens: October 18, 2010
Closes: October 29, 2010

JPMorgan EEMEA Equity Off-shore Fund, an open-ended fund of funds scheme, aims primarily at providing long term capital appreciation by investing in JPMorgan Funds – Emerging Europe, Middle East, and Africa Equity Fund, an equity fund which invests primarily in a diversified portfolio of companies incorporated or which have their registered office located in, or derive the predominant part of their economic activity from, an emerging market in Central, Eastern, and Southern Europe, Middle East, or Africa. The scheme will allocate 80% to 100% of assets in units/shares of JPMorgan Funds - Emerging Europe, Middle East & Africa Equity Fund with medium to high risk profile. It will further allocate upto 20% of assets in money market instruments and/or units of liquid schemes with low to medium risk profile. The scheme will be benchmarked against MSCI EMEA (Total Return Net). The scheme will be managed by Namdev Chougule.

AXIS Gold Exchange Traded Fund
Opens: October 20, 2010
Closes: November 3, 2010

Axis Gold ETF, an open ended Gold Exchange Traded Fund, aims at generating returns that are in line with the performance of gold. The new fund offer price for the scheme is Rs 100 per unit plus premium equivalent to the difference between the allotment price and the face value of Rs 100. The scheme will allocate 90% to 100% of assets in physical gold (includes investments in gold related instruments (including derivatives related to gold) which will be made as and when SEBI permits mutual funds to invest in gold related instruments). The scheme may also invest upto 10% in money market instruments. The scheme will be benchmarked against domestic price of physical Gold. Anurag Mittal will manage the fund.

JPMorgan Global Natural Resources Equity Off-shore Fund, Pramerica Short Term Floating Rate Fund, Birla Sun Life Gold ETF, and Canara Suraksha Fund-Series 1 are expected to be launched in the coming months.

GEM GAZE
October 2010

I have embarked upon the task of picking out one GEM from each of the prominent sector from the October 2010 GEM GAZE. Earlier the GEMs came from any of the sectors with certain sectors left uncovered. This broad-based Sector Fund GEMGAZE is all-encompassing…

ICICI Prudential Infrastructure Fund Gem

The largest fund in the category, at Rs. 3680 crores, it dabbles in every sector barring FMCG, Media, Infotech, and Pharma. Being a multi-sector theme fund, the fund changes the sector composition in tune with market valuations. The top three sectors, energy, financials, and metals account for 55% of the portfolio. For a sectoral fund, the fund is pretty well-diversified with nearly 38 stocks and 75% of the portfolio is large-cap oriented. However, this diversification is highly skewed in favour of specific scrips. The top three holdings alone account for nearly 26% of the fund’s portfolio and Reliance Industries is the fund’s top holding with a weightage of 9.5%. The fund also has a good exposure in the derivatives market. Though currently the fund is invested in equities to the tune of about 93%, historically, the fund has had a decent percentage of cash, debt and money market instruments in its portfolio – balancing the fund’s risk taking ability. The cash levels had however surged drastically during the downturn. The fund manager's contrarian calls give ICICI Prudential Infrastructure an edge over its peers. It expense ratio is 1.83% and the turnover ratio is 123%. Launched in August 2005, the fund has given significant returns since then. It has given 26.88% annualized return since its inception. A relatively high beta fund, ICICI Prudential Infrastructure outperformed its benchmark index – Nifty, with good margins, over the five and three year periods. However, of late, the fund has underperformed diversified funds in one year with a return of 18.59%. Though the good monsoon has played truant acting against short-term earnings for the sector as reflected in the quarterly numbers, this does not in any way alter the outlook for the infrastructure sector.

Reliance Diversified Power Sector Fund Gem

Reliance Diversified Power Sector Fund has generated huge investor interest. This could probably be the reason why a sector fund is, surprisingly, the largest equity fund in India today with more than Rs 5,180 crore of assets under management. Active fund management and portfolio rebalancing is the key. The flexible mandate (power and allied sectors and cash exposure) has been instrumental in the successful management of such a huge corpus. Equity exposure averaged just 68% in 2008 and helped cushion the fall to 50.39%, lower than the relevant sectoral indices and even the Sensex. Though equity exposure dropped to 55% February 2009, the fund manager quickly changed that when the market began to rally in March 2009. In fact, the fund had its best month soon after with a return of 35% (May 11 - June 10, 2009). In 2010, the fund's exposure to stocks is about 97%, while 3% of the total net assets are kept in cash. A large cap-oriented fund with a large cap exposure of 58%, the top three sectors, energy, engineering, and metals constitute 68% of the portfolio. Overall, the portfolio is well-balanced and there is not any over exposure to any particular stock. The expense ratio is 1.81% and the portfolio turnover ratio is 34%. Reliance Diversified Power Sector’s ability to beat the market indices in the bull-run, as well as in the downturn has given this fund an edge over many others in the sectoral theme based funds. The one year return has been 18.52% as against the category average of 13.93%. Though a pessimistic view is prevalent in the power sector in the short term, the long term is promising.

Magnum FMCG Fund Gem

In the past one year, the Rs 30 crore Magnum FMCG Fund has returned 61.77% as against the category average return of 49.85%. 86% of the fund’s investment is in the FMCG sector with the rest in the chemicals sector. There are 15 stocks in the portfolio and 35% of the assets are in large caps. The expense ratio is 2.47% and the portfolio turnover ratio is 45%. Given their ‘defensive' tag, stocks in the FMCG universe usually do not keep up in rising markets, but the past year has been an exception. The BSE FMCG Index, with a return of 26% for one year, has easily beaten the returns of BSE Sensex of about 17%. The reasons for FMCG stocks good performance were two-fold. One, FMCG companies managed the downturn of 2008-09 very well, delivering strong profit as well as sales growth, aided by the rural demand juggernaut. That and their strong cash positions endeared the sector to investors in the aftermath of the economic crisis. Two, home-grown FMCG players have managed to improve on profit growth in 2009-10 helped by acquisitions and expanding overseas operations. However, with the BSE FMCG index seeing its price-earnings multiple climb from its low of 20 to over 28 now, sustaining this kind of financial as well as stock price performance is going to present a challenge. With food inflation rearing up, players are already witnessing pricing pressures and slower growth in segments like soaps and detergents. Rising competition, which is driving up ad spend, too could play spoilsport. But given the mild diversification of this decade old fund, launched in July 1999, an encore could be possible.

Reliance Banking Fund Gem

The very first banking sector fund, Reliance Banking made its debut with a bang. Its return in 2004 put it way ahead of the BSE Bankex and CNX Bank Index. Its performance has been scintillating barring 2006 when certain wrong calls were taken. The fund stood vindicated when it raced ahead in 2007 and fell the least in 2008. The fund manager has a keen preference for public sector banks. The transformation in the space and valuations beckon. Like other sector funds in the Reliance Mutual Fund stable, this one too has the flexibility to go 100% into any of the three asset classes: equity, debt or cash. Despite a high cash allocation way back in July 2004 (64%), the fund manager does not use this leeway to a large extent and even during the credit crisis of 2008, he refused to run to cash for cover. Between September 2008 and February 2009, the cash allocation averaged at around 18.51%. The cash component is 6% at present. The fund manager dynamically manages the fund by oscillating between large and mid caps as well as between private and public sector banks. 55% of the portfolio consists of large caps. He also dabbles in derivatives. The fund strives to exhibit consistency in performance. There are 18 stocks in the portfolio. The current AUM of the fund is Rs 1466 crores and the one-year return is 58.11% as against the category average return of 48.04%. The expense ratio is 2.01% and the portfolio turnover ratio is 31%. The banking sector as a whole has potential but within it there are also a lot of alpha generation opportunities which the fund looks for. Reliance Banking is a compelling choice if investors stay in for the long haul.

Franklin Pharma Fund Gem

This pocket-sized 286-crore pharma category was launched just nine years back. The category till date has five funds making it up. Over the years, it lingered at the bottom of the table but has now emerged out of the pocket. Despite having a miniscule portion of the pie, pharma funds are topping the charts with their recent enticing performance. Franklin Pharma Fund, a very stable decade year old fund, launched in March 1999, at times gets aggressive in its portfolio. This Rs 126.81 crore fund typically has a portfolio of 28 stocks and often takes concentrated bets. Like other pharma funds, this fund also took off as a large-cap, but gradually shifted towards mid-cap stocks. Its interest in small-cap stocks has also increased over time. At present 25% is in large caps. 9% of the portfolio is in cash. The fund has given the maximum returns, since launch, of 29%. Its one year return is an impressive 54.72% as against the category average of 47.42%. The expense ratio is 2.11% and the portfolio turnover ratio is 10.16%. The strong outlook of the pharma sector, besides being a defensive play, will hold the fund in good stead in the years to come.

ICICI Prudential Technology Fund Gem

One of the oldest funds in this category, this fund has been a top quartile performer continuing its winning spree in the past couple of years with a return of 51.17% in the past one year as against the category average return of 37.16%. Currently around 77% of the Rs 108 crore corpus is invested in the technology sector. The only other sector it has diversified into is services. Within the technology space, the fund is inclined towards software with Infosys alone accounting for 51% of the portfolio. The fund has made a fortune with the Infosys stock bought at the time of meltdown. The portfolio is highly concentrated with just 12 stocks. But 66% of the portfolio is large cap-oriented. The expense ratio is 2.49% and the portfolio turnover ratio is 17%.

The starting point in an investment journey should be through diversified equity funds. Thus, while diversified equity funds should constitute your core portfolio and form 90% of it, sector funds could be added to get an extra edge with an allocation of about 10%. Once you are comfortable with diversified equity funds, then you can look at sector funds for the added flavour or returns. Sectoral funds are riskier compared to well-diversified/plain vanilla equity funds. Such sectoral funds are suitable for sophisticated and nimble-footed investors with rich experience in the stock market. You should have a time horizon of three to five years while investing in such narrow-based funds.

FUND FLAVOUR
October 2010

Of exhilarating performance, expiry dates…

According to mutual fund rating agency Value Research, in the last one year, pharmaceutical sector funds have given almost 56% returns, fast-moving consumer goods (FMCG) 50%, banking 49%, and technology 38%. At the same time, equity diversified funds have returned 30% and the Sensex and Nifty have returned 17% and 18%, respectively. Yet, experts advise retail investors to approach theme-based or sectoral investments carefully. There are risks involved in a specific sector which an inexperienced investor will not understand. During the dotcom boom, many invested in the information technology sector. When the sector went bust, scores of them lost even their principal amounts. Bet on such funds only if you have a high risk appetite. While sector funds outperform the broader indices during good times, they fall as fast when markets head south. Sectors have a shelf-life — they perform only in a certain market cycle. You need to understand the sector and know what cycle it is in. You should invest only 10-15% of your portfolio for a minimum of three years in such schemes. A good way of investing in sector funds would be to opt for broader sectors, like healthcare instead of pharmaceuticals, or financial services in the place of a banking sector fund alone.

Infrastructure Funds
Out of favour…

There are about 140 funds which invest in broadly 25 themes in India. Fifteen of them are infrastructure funds. Infra funds are the only thematic funds which are of any meaningful scale. The amount of money in infrastructure funds is Rs 14,133 crore (May 31, 2010), distributed amongst 20 schemes. In fact, the assets of open-ended infrastructure funds account for over 10% of the total assets of equity diversified funds. Unfortunately, this category of funds is out of favour right now with investors simply because it has not been able to race ahead in the latest bull rally that started in March 2009. A fundamental reason could be the high exposure to Energy which was one of the top sectors of almost all the infrastructure funds in 2009. In terms of performance, BSE Oil and Gas (73%) and BSE Power (74%) could not hold a candle to BSE Metals (234%), BSE Auto (204%), and BSE IT (132.78%). But you cannot have a myopic view when investing in such a theme and you must be willing to ride the highs and lows. These funds have rewarded you quite well. During the previous bull run (June 15, 2006 to January 8, 2008), the average absolute return from this category was 89%, as against 69% from the equity diversified category (equity diversified funds excluding thematic infrastructure funds). Surprisingly, they did not fall too hard in the bear phase that followed.

Banking Funds
Brimming with success

The average performance by the top banking sector funds is really good. The quarterly returns are more than 16% and the annual returns are more than 50%. Post-March 2009, the top three banking funds gave very high returns - annual average of 128%, because of the “strong and supportive policies implemented by the Reserve Bank of India” according to a report on thematic funds by CRISIL. Banking and financial services sector funds generated impressive returns due to the rally seen in banking stocks, as the key policy rates were hiked by RBI. Banking Sector Funds returned 49% as against 30% by other diversified equity funds in the past one year.

Technology Funds
In tune with the music…

Technology Funds have done reasonably well returning 38% in the past one year, thus, maintaining their improved performance after being hard hit by the global economic crisis.

Auto Funds
Riding high …

Auto sector has woken from its slumber and has reached its pinnacle of success…but it has been a little more than a year since JM Auto Fund changed to JM Midcap Fund (still auto sector accounts for a third of the stocks in the portfolio). UTI Auto Fund is now the sole fund in this category.

FMCG Funds
Divergent delivery…

FMCG is one of the best sectors to get moderate returns with low risk. The Rs 86,000-crore FMCG industry is expected to witness a lot of action in 2010. With the economy showing signs of revival, the industry is expected to register a 15% growth in 2010 as compared to 2009. The industry will witness a spate of acquisitions & mergers in 2010. There will be a renewed focus on rural consumers too. The country's FMCG industry registered a 12% growth in 2009 despite the economic downturn. Funds that invest predominantly in FMCG stocks have been among the top performing thematic funds over the past couple of years. Not only did these stocks fare relatively better in the falling market of 2008, but they have also participated actively in the stock price rally since March 2009. FMCG funds have been the top performing set of thematic funds in the equity category for both one- and three-year periods. These funds averaged a return of 50% for one year, outpacing the diversified equity category average of 30%. Over a three-year period, the degree of outperformance has also been impressive with FMCG funds managing a 19% compounded annual return to the Sensex's 7%. The three FMCG funds, however, showed substantial divergence, with Franklin FMCG being the best five-year performer and the Magnum FMCG fund topping over one- and three-year time-frames. Despite the rise in input costs, FMCG industry is likely to sustain its robust growth momentum aided by increased rural incomes, taxation benefits, and gradual shift from the unorganised sector/regional players.

Pharma Funds
Divergence despite dream run…

The Indian pharmaceutical sector has had a dream run in the stock markets, with the BSE Healthcare Index returning a whopping 56% over the past one year. This not only betters the 17% returned by Sensex, but that of the broader market as well as a host of other sector indices. Pharma funds beat the two indices even over three- and five-year periods. Interestingly, pharma funds surpassed other sector funds as also the diversified equity funds category average returns over one- and two-year periods. Their impressive performance notwithstanding, pharma funds saw a wide divergence in their returns. While Reliance Pharma and Franklin Pharma funds consistently came up with ‘above average' returns across one-, three- and five-year periods, the other two lagged by a significant margin. UTI Pharma & Healthcare's performance was mediocre while Magnum Pharma scored poorly over the three periods.

PSU Funds
Promising potential…

With the government planning to raise Rs 40,000 crore through divestment in public sector units (PSUs), retail investors have a good investment avenue. PSUs have tremendous growth potential. They have helped in creating a diversified industrial base for the country. SBI Mutual Fund launched a PSU Fund in June 2010. UTI Mutual Fund, Religare Mutual Fund, and Sundaram BNP Paribas Mutual Fund had launched similar funds in 2009. There is a strong case for investing in PSU funds. The PSU Index has outperformed the Sensex in the last 10 years. Therefore, there is immense unlocked potential in these companies. In the last 10 years, the PSU Index has returned over 805%, while the Sensex has given almost 251% returns. Given the scale, the size and the reasonable valuation of most PSUs, holding these stocks can be a good bet from a risk-reward perspective. The PSU theme looks promising on the back of strong fundamentals of these companies, most being leaders in their sectors. During the economic slowdown, they showed greater resilience than their private sector counterparts. The new norm of minimum 25% public holding in all listed companies will help you get a good value for money and choice of companies.

Benchmark Mutual Fund has filed an offer document with the Securities and Exchange Board of India (SEBI) for the launch of six open-ended exchange traded funds (ETFs). All the planned launches are sector-specific. Benchmark has positioned itself as an index fund house. It already offers a Banking ETF, Gold ETF, and PSU ETF. Now the fund house wants to offer the entire range – IT BeES, FMCG BeES, Services BeES, Energy BeES, Pharma BeES, and Realty BeES.

…and diversification

Diversification is one of the cornerstone principles of mutual fund investing. Sector funds that focus on high-growth sectors or narrow niches of the economy tend to be volatile. It is generally not advisable to commit a substantial portion of your total assets to a single sector fund. Maintaining adequate diversification across sectors in your overall mutual fund portfolio is good investing practice. Having a sectoral allocation is alright if you know the sector well enough and have the risk-taking ability. However, even then, it is not a bad idea to diversify your risks through investing in a variety of fund types and thus a reduction in overall risk. After all, why put all your eggs in one basket?