Over the last couple of weeks, domestic markets have woken up to the sub-prime problem, an issue that finds its roots in the US housing market, but one that has quickly spread across other countries. The BSE Sensex posted a loss of 1.78% to close at 14,868 points; the S&P CNX Nifty fell by 1.57% to close at 4,333 points. The CNX Midcap closed at 5,938 points (down by 1.87%).

Sub-prime loans are offered to individuals who do not have the requisite credit history to qualify for regular loans (referred to as prime loans). Since individuals who have taken sub-prime loans do not have a stable credit history, the default rate of these loans is much higher. If it were left only at this level, the sub-prime problem would not have assumed such monstrous proportions. The problem escalated because the sub-prime loans were bundled into securities that were eventually bought by mutual funds and other institutional investors without accurately assessing the risk in these investments. When the individuals opting for the sub-prime loans defaulted, it triggered a chain reaction that adversely impacted all entities linked to the sub-prime loans.

While the sub-prime problem is of a relatively unfamiliar nature as far as the Indian investor is concerned, sector funds are not that unfamiliar. For some inexplicable reason, sector funds continue to mesmerise investors, despite their non-performance over longer time frames. In spite of performing only in patches and taking on very high risks (which translates into a volatile performance) compared to diversified equity funds, sector funds still catch the investor's fancy every time a particular theme/sector is in the limelight. At present, infrastructure is the mutual fund industry's pet theme so there is a lot of investor interest around it. Personalfn did a 3-part series on sector funds and established that these funds simply fail to measure up with their diversified peers over the long-term:
 

• Tech Funds: A mistake if you had invested
   

• Pharma Funds: Bitter Returns
   

• Infrastructure Funds: Hot Property!

    Leading open-ended equity funds

  Equity Funds	NAV (Rs)	1-Wk	1-Mth	6-Mth	1-Yr	SD	SR
  JM Emerg. Leaders	12.93	2.91%	4.16%	26.01%	25.52%	7.74%	0.10%
  Franklin Infotech	48.81	2.10%	-3.39%	-14.96%	13.07%	7.63%	0.22%
  JM HI FI	12.05	1.39%	1.41%	12.06%	36.43%	10.87%	0.11%
  UTI GSF Software	25.78	1.38%	-6.08%	-11.74%	27.00%	8.34%	0.27%
  Reliance Media & Ent.	29.61	0.64%	0.09%	22.02%	77.37%	8.82%	0.30%

  Source: Credence Analytics. NAV data as on August 10, 2007.)
  (Standard Deviation highlights the element of risk associated with the fund. Sharpe Ratio is a measure of the returns offered by the fund vis-à-vis those offered by a risk-free instrument)

  Sector and thematic funds dominated proceedings in the equity funds segment. JM Emerging Leaders (2.91%) emerged as the top performer, followed by Franklin Infotech (2.10%) and JM HI FI (1.39%).

  Leading open-ended long-term debt funds

  Debt Funds	NAV (Rs)	1-Wk	1-Mth	6-Mth	1-Yr	SD	SR
  ICICI Pru. Long Term	16.10	0.18%	0.64%	4.10%	7.62%	0.19%	-0.10%
  Sahara Income	13.47	0.17%	0.63%	3.69%	8.48%	0.35%	-0.16%
  Sahara Gilt	12.72	0.16%	0.13%	2.29%	5.91%	0.34%	-0.40%
  Birla Floating LTP	12.71	0.15%	0.52%	4.27%	7.96%	0.16%	-0.06%
  DWS Floating	12.46	0.15%	0.58%	3.77%	7.55%	0.08%	-0.01%

  (Source: Credence Analytics. NAV data as on August 10, 2007.)

  ICICI Prudential Long Term Plan (0.18%) topped the long-term debt funds segment. Two funds from Sahara Mutual Fund i.e. Sahara Income (0.17%) and Sahara Gilt (0.16%) occupied second and third positions respectively.

  Leading open-ended balanced funds

  Balanced Funds	NAV (Rs)	1-Wk	1-Mth	6-Mth	1-Yr	SD	SR
  JM Balanced	27.34	2.01%	3.33%	17.38%	40.12%	6.38%	0.37%
  Birla Sun Life 95	206.76	0.47%	1.85%	14.07%	43.81%	5.27%	0.35%
  UTI Variable Invest.	17.26	-0.56%	0.45%	4.30%	12.25%	2.50%	0.23%
  Principal Balanced	23.71	-0.71%	-0.42%	7.87%	22.66%	6.19%	0.20%
  ICICI Pru. Balanced	36.15	-1.01%	-2.64%	2.58%	21.92%	5.41%	0.26%

  (Source: Credence Analytics. NAV data as on August 10, 2007.)

  In the balanced funds segment, only two funds i.e. JM Balanced (2.01%) and Birla Sun Life 95 (0.47%), managed to close the week in positive terrain.

  As markets serve a painful reminder to investors, it is time for them to do a reality check on their risk appetite and investments. For many investors, the last 3-4 years was all about making easy money over a short period of time at minimal risk. Stock markets are far removed from that; there is no easy money to be made in the stock markets, your investment time frame for investing in equities needs to be really high (at least 3-5 years in our view) and the risk of investing in equities is anything but minimal.

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