This article written by Personalfn was carried by Business India in the April 26, 2004 issue. Make no mistake; sector funds are on a comeback trail. It appears as if all that it takes is a bull run to bring on an onslaught of sector funds launches. The last time we saw so many sector funds being launched was during the last bull run in 1999-2000. There are obvious reasons behind the sector fund-bull market association greed being the most important.
The current rally in the markets has doubled up as a launching pad for sector funds. One would have thought that mutual funds and investors would have learnt their lessons from the earlier misadventure in 1999-2000. Then technology/media/telecom ruled the roost with fast moving consumer goods (FMCG) and pharma playing second fiddle. Consequently these sectors hogged the sector fund limelight. In addition to these, we had a small sprinkling of mutant sector funds in the form of MNC Funds (targeting multinationals), basic (cement, metals, engineering and the like) and petro funds (oil and gas).
In comeback mode? | SCHEME NAME | NAV (Rs) | 1-Mth (%) | 3-Mth (%) | 1-Yr (%) | 3-Yr (%) | Inc. (%) | SD (%) | SR (%) | ASSETS (Rs m) |
| Alliance Basic Industries(G) | 30.82 | 10.1 | 5.3 | 152.6 | 56.4 | 34.8 | 7.84 | 0.55 | 997 |
| SUN F & C Resurgent IEF (G) | 33.18 | 7.2 | (1.0) | 157.9 | 51.3 | 38.4 | 8.19 | 0.53 | 46 |
| JM Basic Fund | 11.54 | 8.9 | 3.2 | 84.1 | 49.1 | 35.4 | 7.24 | 0.36 | 316 |
| Magnum Contra Fund | 11.86 | 19.8 | 14.3 | 149.2 | 48.1 | 20.8 | 8.17 | 0.41 | 161 |
| UTI GSF- Petro Fund | 20.22 | 8.2 | 4.8 | 140.8 | 47.0 | 38.8 | 8.34 | 0.45 | 2,825 |
| DSP ML Opportunities (G) | 21.27 | 9.6 | 4.3 | 153.3 | 43.3 | 25.0 | 7.39 | 0.52 | 5,926 |
| Birla India Opportunities B | 22.04 | 5.6 | (1.4) | 84.8 | 35.8 | 9.8 | 7.62 | 0.24 | 731 |
| Tata Select Equity Fund (A) | 16.69 | 10.7 | (3.4) | 132.8 | 32.3 | 16.9 | 8.39 | 0.34 | 537 |
| Tata Life Sc & Tech Fund (A) | 18.97 | 9.6 | 4.1 | 142.0 | 31.2 | 16.6 | 7.19 | 0.41 | 311 |
| Magnum Pharma Fund | 17.82 | 10.1 | 5.7 | 140.9 | 30.8 | 15.2 | 8.07 | 0.34 | 244 |
| BSE Sensex | | 6.6 | (2.1) | 93.9 | 17.4 | | | | |
| S&P CNX Nifty | | 6.9 | 2.6 | 95.0 | 17.3 | | | | |
| S&P CNX 500 | | 8.8 | (0.2) | 120.2 | 28.2 | | | | |
| BSE Healthcare | | 8.1 | 2.7 | 95.7 | 44.9 | | | | |
| BSE IT | | 6.5 | (7.7) | 84.4 | 10.7 | | | | |
| BSE FMCG | | (3.8) | (16.5) | 32.6 | (0.4) | | | | |
(NAVs sourced from Credence Analytics. NAV-related info as on April 19, 2004. Growth over 1-Yr is compounded annualised)
A fundamental problem with sector funds was the timing of the launch. You would expect a smart fund manager to identify a sector while it was dormant, undervalued and waiting to be discovered. Unfortunately with some exceptions like Franklin Infotech (then Kothari Pioneer Infotech) and JM Basic Fund, most sector funds were launched when the sector was peaking. From those levels, there was only way the sector could go down. And when the Sensex was hovering at 6,000 points, that slide was waiting to happen.
With the market crash in 2000, the harsh realities of managing a one-sector fund caught up with fund managers. Fund managers were forced to look beyond the target sectors and invest in unrelated companies. So we had software funds buying Hindustan Lever because the company had launched an initiative to link all their suppliers with the help of technology. Some software funds like Birla IT Fund (now Birla Opportunities) and IL&FS Ecom (IL&FS Global) went back to the drawing board and applied for a change of investment objective with SEBI to turn more diversified. With a more broad-based investment mandate, performance improved, but that was thanks largely to diversification, which meant that funds had come full circle.
The ones that failed to impress¦ | SCHEME NAME | NAV (Rs) | 1-Mth (%) | 3-Mth (%) | 1-Yr (%) | 3-Yr (%) | Inc. (%) | SD (%) | SR (%) | ASSETS (Rs m) |
| Magnum IT Fund | 7.75 | 3.2 | (8.3) | 71.0 | 3.8 | 4.2 | 8.72 | 0.06 | 404 |
| SUN F & C Emerging Tech. (G) | 4.30 | 4.1 | (5.3) | 68.9 | 5.5 | (15.7) | 8.68 | 0.04 | 313 |
| Kotak Techology Scheme | 4.27 | 2.1 | (6.2) | 72.6 | 6.2 | (14.2) | 8.32 | 0.13 | 481 |
| UTI GSF- Software Fund | 10.64 | 2.6 | (5.8) | 77.3 | 7.5 | (0.4) | 9.19 | 0.07 | 1,870 |
| Chola Opportunities Fund (Cum) | 11.65 | 5.6 | (5.7) | 55.5 | 10.0 | 2.2 | 6.66 | 0.08 | 108 |
| Pru ICICI FMCG Fund (G) | 11.93 | 8.8 | (6.9) | 59.5 | 10.4 | 3.1 | 6.65 | 0.14 | 367 |
| Franklin Infotech Fund (G) | 19.40 | 3.1 | (2.6) | 78.9 | 10.4 | 27.9 | 9.16 | 0.12 | 1,240 |
| Franklin FMCG Fund (G) | 14.93 | 3.5 | (8.5) | 48.0 | 11.4 | 8.9 | 5.17 | 0.17 | 212 |
| Alliance New Millennium (G) | 6.75 | 10.3 | (2.5) | 92.1 | 12.4 | (17.9) | 8.41 | 0.14 | 1,231 |
| Pru ICICI Technology Fund (G) | 5.12 | 4.5 | (6.7) | 106.0 | 14.6 | (14.8) | 9.74 | 0.16 | 1,287 |
| BSE Sensex | | 6.6 | (2.1) | 93.9 | 17.4 | | | | |
| S&P CNX Nifty | | 6.9 | 2.6 | 95.0 | 17.3 | | | | |
| S&P CNX 500 | | 8.8 | (0.2) | 120.2 | 28.2 | | | | |
| BSE Healthcare | | 8.1 | 2.7 | 95.7 | 44.9 | | | | |
| BSE IT | | 6.5 | (7.7) | 84.4 | 10.7 | | | | |
| BSE FMCG | | (3.8) | (16.5) | 32.6 | (0.4) | | | | |
(NAVs sourced from Credence Analytics. NAV-related info as on April 19, 2004. Growth over 1-Yr is compounded annualised)
But have sector funds really done what they set out to achieve? If it was long-term capital appreciation that was on the fund manager's mind, its certainly an unfulfilled dream as far as the investor is concerned. While there is no denying that sector funds have posted capital appreciation intermittently, these were in very short bursts over 3-6 months. That is largely because few sectors have put in a secular year on year growth on a consistent basis to make it worthwhile for investors to take concentrated bets on the sector. In fact, it is to avoid concentrated sector/stock bets that diversified equity funds consider their most important objective. To that end, sector funds go against the grain of mutual fund investing.
Which brings us to the question if sector funds haven't really redeemed themselves over the years, why are they on a comeback trail? One reason is because some things never change. Investors are not resolute enough to avoid blunders they had committed in the past. Greed and the lure of easy money makes them see an opportunity in just about any investment even it's a high risk high return one like a sector fund. On their part fund houses have tried to be a little innovative while launching sector funds this time around. So we have Reliance Banking that gives the fund manager the flexibility to go completely into debt if the situation warrants it. UTI has launched a series of Thematic Funds with sector funds in the auto, basic industries, banking and PSU sectors. JM Mutual Fund is another fund house that has firmed up plans to launch sector funds.
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