At Personalfn, we have never been advocators of sector/thematic funds; in fact we have always considered them to be bugbears for investors. Sector funds (which invest in stocks from a single sector like pharma or software) or thematic funds (which invest in stocks from multiple sectors related to a single theme like commodities or infrastructure) go against the basic philosophy of mutual fund investing by depriving investors of the benefits of diversification across sectors/themes. These funds typically tend to be high risk-high return investment propositions and are suited for investors with a commensurate risk appetite.

With equity markets running into rough weather, the performance of equity-oriented funds has come under the scanner. The performance of one thematic fund in particular i.e. Magnum COMMA Fund (MCF) caught our eye. The fund was launched with much fanfare in August 2005, when the markets had hit a purple patch and a deluge of new fund offers (NFOs) was the order of the day.

MCF is a thematic fund which is mandated to predominantly invest in stocks of companies engaged in the commodity business from four sectors i.e. Oil & Gas, Metals, Materials and Agriculture. The fund is benchmarked against BSE 200.

Magnum Comma: In comma mode

	NAV (Rs)	1-Wk	1-Mth	6-Mth	Since Incep.
MAGNUM COMMA (G)	11.46	-9.41%	-30.04%	6.41%	13.80%
BSE 200		-6.16%	-24.92%	-1.81%

(Data sourced from Credence Analytics. NAV data as on June 12, 2006)

MCF's performance history of around 10 months accurately embodies what investing in a thematic fund is all about. The fund trailed its benchmark index i.e. BSE 200 for a better part of its existence. However it changed gears in April 2006 and the fund's performance looked up. At it peak in May 2006, the fund had clocked a growth of nearly 70% (since inception in August 2005) and was successful in outperforming its benchmark as well.

The subsequent downturn in markets (wherein commodity stocks were mainly at the receiving end), saw the fund's performance drop sharply. At present the fund features among the biggest losers in the equity funds category having posted a loss of over 30% over the last month.

 

So is it curtains for MCF? Not necessarily. True to the nature of sector/thematic funds, MCF could well bounce back with an impressive showing. However rest assured, such a performance is unlikely to be an enduring one. Sector/thematic funds are best equipped to deliver over shorter time frames. Over longer time frames (at least 3 years, which is ideal for making investments in equities), sector/thematic funds typically tend to under perform their peers from the diversified equity funds segment.

In turn, this makes sector/thematic funds suited for investors who have an informed view on the underlying sector/theme and can understand the intricacies of investing therein. Such investors can accurately time the entry and exit of their investments and thereby best utilise the opportunities in a given sector/theme.

For retail investors, conventional well-diversified equity funds continue to be the best bet. Thanks to the broad investment mandate, the fund manager can invest in stocks across sectors including the ones held in a sector/thematic fund. Also the fund manager has the liberty to invest in different sectors, once a given sector turns unattractive. The fund manager of a sector/thematic fund can't do so as it would amount to breach of mandate.

As always, our advice to investors is to steer clear of sector/thematic funds and instead invest in well-managed diversified equity funds with established track records.

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