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Dhirendra Kumar
Variety is the spice of life - or so the mutual fund industry believes. At present, there are a dozen specialised sector schemes on offer under the growth umbrellas of the Unit Trust of India, SBI Mutual Fund and Tata Mutual Fund. Life sciences & technology fund, brand value fund, IT fund, pharma & healthcare fund, FMCG fund, contra fund, agro & bio-chemicals fund, petro fund, telecom fund..... the list goes on.
With so many similar investment opportunities available at one go, these funds are likely to attract one's attention. Then comes the question -- are these new funds worthwhile or even superior investments? How good are specialised/sector funds?
With my conventional investment wisdom, I have always warned investors to steer clear of new mutual funds and to stay with funds which have a proven track-record of three years or even longer. But an investor who has followed that advice, will be forced to ignore 66 of the 101 open-end funds which have been launched over the past three years - including 31that are less than a year old.
At the very least, their performance in recent years merits a further study. I took a closer look at the numbers to make a more-informed investment decision. The key finding is that the new equity funds have given higher returns than their older peers. This higher return, however, has been driven by greater risk-taking on the part of these new funds. In general, on a risk-adjusted return basis, these funds have not outperformed their older peers. Importantly, evaluating funds based on longer periods of performance is still a good idea.
On the attractiveness of a sector fund, these funds with their sharp focus should deliver superior returns and the sector outlook of the funds being offered is very bright over the medium to long-term time horizon. However, these funds lose out on the benefits of diversification. A sector fund contains 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 stocksof the specific industry irrespective of a pessimistic or optimistic forecast for the sector and build a portfolio that gives the best risk-return payoff within the constraints of sector investing. The sector funds on offer are ideally suited for investors seeking growth in a time horizon of three-to-five years through investment in shares of well managed funds with bright prospects.
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. A smart investor in a new fund should do some homework first.
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
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