The Hindu Business Line : Sector funds - Use them to supplement returns

CHECK out the pedestrian returns delivered by some of our sector funds and you will know why everybody loves to hate these narrowly-focused schemes. Indeed, the performance put up by a section of the sector-specific products can, at best, be described as second-rate.

Investors have generally shunned them, except during times of unusual fervour. The technology boom, witnessed a few years ago, is a case in point.

Examples of poor performance abound. If you had entered the pharma fund managed by Franklin Templeton one year ago, you would have ended up with a measly 4.24 per cent (as on April 22). Or, if you had invested in UTI's petro fund a year back, your take-home would have been a not-so-encouraging 4.58 per cent as on that date. There are other horror stories.

As mutual fund circles point out, investors in sector funds are an intrepid lot. Clearly, they have chosen to park their money - not in `normal' diversified schemes - in funds that are, by definition, restricted to sectors of their choice. In other words, these options are not broad-based enough and are, therefore, inherently more risky.

The point is, sector-oriented schemes need not constitute an investor's core holding. In gastronomic terms, these may only serve to supplement his or her main diet.

Consider, for instance, an investor who has chosen to invest in growth funds managed by Franklin Templeton. Investments in, say, Bluechip and Prima may be supplemented by Franklin FMCG. What would drive such an allocation? Clearly, both Bluechip and Prima, diversified equity products as they are, have their individual USPs. And the FMCG fund, which limits itself to its very own universe of stocks, is taken on board because the investor has great faith in that sector's latent potential. A major upside on the FMCG front, when reflected in prices of FMCG stocks, would boost returns that are otherwise generated by Bluechip and Prima.

Clearly, choosing the right sectoral product should be the most important consideration for an investor. Take the case of SBI Magnum Pharma Fund, which was introduced in July 1999. This scheme provided a solid 33.07 per cent to unit holders over the past one year, emerging as the category leader. In comparison, UTI Pharma & Healthcare gave a low 9.23 per cent during the same period.

One needs to appreciate that tech funds, too, have their merits. This, despite the greater risk they carry. The craze for sectoral products had peaked during the IT boom. A number of tech funds were launched those days, not all of which survived the crash that followed. That crash led a few fund houses to drastically alter their tech products. The latter (like schemes offered by Birla Sun Life and Cholamandalam) assumed a more diversified role. A few tech funds are still around to tell the tale. But, for all you know, tech stocks would probably never reach those crazy valuations. That realisation makes the situation even more appalling for those who had invested in the IPOs and have actually stayed put.

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

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