Now the million dollar question is: Are these sector stories sustainable? These sectors have proved to be the only profitable heaven for investors in the prevalent bleak economic scenario. Thereby creating shareholder's wealth mainly based on their strengths and to an extent forpaucity of alternatives.

The FMCG and pharma are defensive and non-cyclical sectors insulated from economic recession with their sustained healthy returns and backing of professionally managed foreign companies.

The asset base of the FMCG sector is formed by a wide product portfolio, ability to create niche markets and brand expansion, media support and wide distribution network. A number of FMCG stocks satisfy some of the above criteria. The sector has a potential to generate higher returns with: Higher personal incomes and greater penetration of rural markets; strong brands and quality products; innovation and healthy competition.

Indian pharma industry, another capital intensive sector, has an asset base as a major exporter of drugs. It is also characterised by joint venture with leading foreign companies and a strong and delivering R&D. India's current per capita health care spending is among the lowest in the world and is expected to increase rapidly on account of aging population, rising lifespan and growth in income spent on medicines. This sector will get a further boost with the following reforms on the anvil: Doing away with the Drug Price Control Order; granting of EMRs; granting of product patents and automatic approval for foreign investment up to 74 per cent.

Although these sectors have a bright prospect, sector funds are meant only for investors with a higher appetite for risk who wish to capitalise on the upswing of the specific sector.

Sector funds lose out on the benefits of diversification and hence should not be used as the sole investment vehicle by lay investors. A well-diversified portfolio will cover a broad spectrum of industries and companies, which are affected differently by business cycles and the macro-economic environment. A sector fund on the other hand will contain stocks that react in a similar fashion, either up or down, to factors affecting the industry.

A sector fund will have to stick to the stocks of the specific industry irrespective of pessimistic oroptimistic forecasts for the sector and build the portfolio that gives the best risk-return payoff within the constraints of sector investing.

Further, there is a difference in the rally exhibited by the software scrips on one hand and that of the pharma and FMCG on the other. Trading in the FMCG and pharma is concentrated only in the scrips unlike the infotech stocks where investors have dug deep into the B1 and B2 listings. The top-rank FMCG and pharma companies have received enormous boosts but will this bullishness trickle down and positively impact valuations of smaller companies? The chances of being caught in a scrip which continues to lose ground is reasonably high. But considering the entry barriers in these two capital intensive industries, unlike the infotech sector where the only prerequisite is the intellectual infrastructure, only serious players would venture into these sectors reducing the possibility of a major fall in the value of the scrip.

The three sector funds on offer are ideallysuited for investors seeking growth in a time horizon of three to five years through investment in shares of well managed, fast growing FMCG/pharma companies. However, investors should look at these funds as an add-on to enhance their overall return to an already diversified portfolio. These funds are not complete investment solutions.

--Value Research