The Hindu Business Line : Have you invested in the right sector funds yet?

Should you include sector funds in your portfolio? Or, should you shun them altogether, considering the risk involved in parking money in funds that are too narrowly focused? Before you answer these questions, consider these two real-life situations, which have evolved over the past six months.

Situation one: Technology and banking funds have both turned in more than 30 per cent in this period. This makes them the top two performing categories among all equity funds as of November 24.

Situation two: FMCG and pharma funds are the two worst performers at the end of the same six-month period. These have provided 5.74 per cent and 4.16 per cent respectively.

Now, if you have not arrived at the answers yet, let us help you form an opinion on what may seem to be a tricky issue.

Sector funds can add considerable pep to your portfolio if these are chosen well. If your advisor had recommended an exposure to tech funds a year ago - these have given an average 51 per cent in the last 12 months - you should be thanking him profusely by now. Such performance would stand out even more, considering what certain other categories of equity funds have provided during this period. You may well remember here that the one-year average for diversified funds is 43 per cent or so.

How have the other sector-specific funds performed in the recent past? Well, auto funds provided 13 per cent in the past six months. There are a few one-off options (like Reliance MF's fund for media & entertainment, which has given a neat 6 per cent for the week ended November 24) that have scored reasonably too. The funds that carry tags like `Infrastructure' really do not fit into any sectoral mould.

The way the MF sector has been evolving, it is now actually possible to turn out any number of innovative, sector-based funds. Here, we can recall the smartly-named Internet Opportunities Fund that the erstwhile Kothari Pioneer introduced. That was, quite clearly, at a time when such an identity brought in droves of investors.

In future, therefore, do not be surprised to see a fund dedicated to only retailing companies, or one focused just on logistics stocks. And this may happen sooner than you think, considering the manner in which the breadth of the market is expanding. Witness the great variety of companies that are entering it these days.

The point, friends, is that sector funds are here to stay and indeed multiply. The question is, should we trust sector funds enough so as to step up allocation? There are no precise answers, but recent statistics give us enough clues.

Sectoral plays, to use a cliché, are not for the faint-hearted. It takes courage to stay away from a wide-spectrum, diversified fund and go in for one that (by definition) has a limited investment universe.

MFs suggest that a large section of investors like to use a sector fund as a temporary solution - to make the best of a rising trend impacting a certain slice of the economy. This is perhaps the most effective strategy.

A quick reference to banking funds can be made here; check out the increasing valuations of bank stocks (especially that of PSU banks) and you will know why this could make a good case for sector-specific choices.

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

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