The Hindu Business Line : Bear sting hurts sector-specific funds

WEAKENING sentiments prevailing in the equity market have taken quite a heavy toll on sector-specific funds. These funds have restrictions placed on their investment strategies and cannot look beyond their limited universe.

The restrictions make it impossible for them to invest elsewhere even when their chosen sectors continue to underperform.

A look at some of the figures turned out recently by sector funds will tell a bitter tale. Considering their three-month tallies, petro funds have performed most poorly, recording a negative score of 19 per cent. The tech, FMCG and pharma funds have all done comparatively better, albeit on the negative side. These have gone down by 4.11 per cent, 7.88 per cent and 0.24 per cent respectively.

The interesting thing is that diversified equity funds too have on an average not performed considerably better. Their three-month mean is a negative 11.68 per cent. The tech, FMCG and pharma funds, therefore, have actually logged more attractive numbers. These numbers, worked out by Value Research, relate to data as on May 31.

Does this mean that investors should go in for sector funds more aggressively in the days ahead? That's not an easy question to answer, not when you consider so many issues that stick out.

A diversified fund, it must be remembered, draws its strength from the very fact that it has a mixed portfolio. Its assets are made up of the best stocks representing a variety of sectors; even if a few of them fail to do well, the others may be in a position to boost the overall returns. It is quite possible that such a fund would deliver the goods over a decent length of time.

A sector-specific fund, on the other hand, has narrow vision. As we have mentioned before, diversification is not its forte and it has to invest only in a select set of companies.

It may be mentioned here that the number of sectoral options is increasing in the India market. New schemes are being lined up - consider the proposals announced recently by the likes of Reliance MF and JM MF - and others are being contemplated. A few fund houses are actively working out specific products for the critical segments of the economy. And if you go by what Reliance and JM have planned, these segments include auto, pharma, media and power.

Investment circles underline the need for sector funds, which, they suggest, must exist along with their more diversified counterparts. Despite the added risk associated with them, these sectoral plays are important for investors who are willing to walk that extra mile. Such investors expect these funds to energise their holdings, a possibility that cannot be ruled out when sentiments turn positive for the sectors concerned.

Some fund houses have so far resisted the temptation of launching sector funds. Even during the height of the tech boom, players such as Sundaram MF went against the trend. One can assume that it was a hard decision to take. On hindsight, it was probably a smart call.

Just look at the tech funds that have been converted into broad-spectrum products and you may start thinking afresh.

Feedback may be sent to blcal@vsnl.net

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