The Hindu Business Line : A bad month for sectoral funds

The last few days, marked as they were by a rapid and sharp decline in stock prices, have come as a major lesson for those getting too snug about the advancing equity market.

That NAVs of equity funds have witnessed a rout is clear from the latest performance numbers. Take, for instance, banking funds, a category that had over the past months emerged as the champion. These funds, considering the one-year period ended August 17, 2007, have given just a little over 50 per cent on an average – a huge change from what they were known to have delivered a few weeks ago.

You may argue that 50 per cent in a year is still quite good, given the kind of volatility that the market has seen during this period. That’s entirely true. However, considering the near-100 per cent returns these funds had given – we do not remember the exact date on which this happened – the latest show is relatively modest.

For sector fund aficionados, the past one month or so has been particularly punishing. Pharma funds, which have turned in a negative 11 per cent, have been the worst hit. Technology and auto funds have handed out minus 9.8 per cent and minus 8.5 per cent respectively. That the picture was starkly different a year back can be judged by their earlier scores. Tech funds, for instance, gave 27 per cent-plus for the one-year period ended August 17. These figures have been released by Value Research.

To cut a long story short, investors’ experience with narrow, sectoral products has suddenly turned bad. How have the diversified equity funds (which are far more broadbased in terms of portfolio composition) fared?

Let’s turn to the latest numbers once again to get an idea. Returns from diversified funds, about 27 per cent for the same one-year period, dropped to a measly 1.7 per cent, taking their three-month average score into consideration. And if you take just a month, it is a negative 7 per cent. In short, not a very comforting thought.

The question before investors – and fund managers now want them to answer these – is whether to put in fresh money when the situation turns stable. The latter may coincide with a far greater fall in the market than what is being anticipated by most. Investors – we are particularly talking about those with additional money to allocate – may well explore the possibility of stepping up their commitment.

Before we really start getting terrified, let us tune in to a little bit of advice dished out by Morningstar. Do not think it is somewhat out of place; in fact, it is quite pertinent in the current context. Here goes: “At Morningstar, we’re long-term investors, and we encourage you to be as well. But even we get a little guilty pleasure out of mutual funds’ short-term performance. Sometimes looking at the short-term leaders’ and laggards’ boards can even be informative”.

That’s particularly true when markets are behaving badly – as they have over the past month, Morningstar has mentioned, adding that market indexes peaked around mid-July – and have been bouncing around since then. “The best performers over the past month, not surprisingly, have been those that deliberately bet against the market, primarily bear-market funds. These funds are acting exactly as we would expect them to,” it has stated.

Feedback may be sent to nilanjan@thehindu.co.in

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