The Hindu Business Line : Fund Talk

There are now several articles that suggest that sectors such as pharma and banking are expected to outperform, after under-performing in recent years. Technology, FMCG and infrastructure are also expected to do well. What is your opinion on the funds that focus on these sectors? I have invested in a few well-established diversified funds through systematic investment plans.

Should I continue investing in the diversified funds I own as most fund mangers with a good track record are supposed to make the sector call or can I consider exposure in sector funds?

I don't mind taking a risk (for a small portion of investment, say 5 per cent) on specific sectors that are likely to outperform. I prefer to invest through sector-specific fund instead of direct stock-picking and will invest through SIPs.

What are the good sectors for the next one or two years and which funds can be chosen? My chosen funds are Magnum Pharma, PruICICI FMCG, Franklin Infotech, Reliance Banking and Tata Infrastructure.

Ajay Sreenivas

Dubai

You have identified just five sectors you believe will do well over the next year. Investing in a diversified fund will allow you to capitalise on the opportunities across different themes and, therefore, offers a superior option to focussing on a single sector, which may or may not outperform. Over the past year, the average return of sector funds, barring technology funds, have been lower than that of diversified equity funds. This is partly because the bull rally has been secular and not dominated by any single theme.

Over the past year, technology funds have delivered returns superior to the average diversified fund. Even so, they do not necessarily figure at the top of the fund rankings. Diversified funds with a good track record, such as HDFC Top 200, have been, on the other hand, able to capture the trend in a particular sector by taking focussed exposures in select two or three stocks that stand to gain the most. The fund, which has FMCG and technology among its top three holdings, has outperformed technology and FMCG funds over the past year.

Sector funds are recommended only for informed investors who can assess the potential of a fund's portfolio and time their entry and exit into a sector well. Such investors might opt for the mutual fund route rather than invest directly into stocks as a means for diversification.

If you have an above-average understanding of a particular sector and are convinced of its potential, you can allocate 5-10 per cent of your overall portfolio to the respective sector fund. If you get your timing right, the focused exposure to the sector might help in adding some zing to your portfolio of many diversified funds. Investing in sector funds, however, demand active profit booking rather than a buy-and-hold approach. You will have to monitor developments within a sector closely.

In several cases, funds that invest in a particular sector tend to have widely divergent performances. For instance, Magnum Pharma and JM Healthcare have delivered returns of 23 per cent and 12 per cent respectively, over a one- year period.

The funds you have identified have largely been top performers within their categories over a five-year period, barring Franklin Infotech, where the pick-up in performance has been more recent. You can choose these funds if you are convinced of the sector theme.

As the bulk of the returns from these funds is likely to be earned in a short period, investing a lumpsum might be superior to investing through SIPs. For funds that focus on broad themes such as consumption or infrastructure, which are likely to reap the benefits over a longer period, SIPs can be considered.

It is quite likely, however, that several diversified funds that you own already favour these themes. If you are intent on taking a more focussed exposure, you could consider a fund such as DSPML Opportunities, which takes concentrated exposures to prevailing themes.

Queries may be e-mailed to mf@thehindu.co.in, or sent by post to Business Line, 859- 860, Anna Salai, Chennai 600002.

Shanthi Venkataraman

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