Unlike a sector fund, a specialty fund does not track a particular sector or industry. And unlike a diversified equity fund, a specialty fund is constrained due to narrowed investment universe though the portfolio is spread out in comparison to a sector fund.

The set of specialty funds available is essentially thematic - it could be a blend of two or three sectors, it could focus on the niche areas for a set of companies, invest in companies with strong brands or simply target out-of-favour sectors on the bourses.

The market for specialty funds is young in India with nine out of eleven funds launched in the last one year. Unit Trust of India has the maximum number of specialty funds at three while Alliance Capital manages two specialty funds.

It is difficult to recommend a particular specialty fund for a set of investors. In other words, most specialty funds are not tailor-made to suit the requirements of an investor. Rather, the onus is on the investor - if he is convinced with a particular theme, he should invest in that specialty fund.

Investment universe
Specialty funds invest in a diverse basket of stocks and sectors. For instance, a brand fund will build a portfolio of companies, whose brands are synonym with the products like Telco for trucks, Colgate for toothpaste and Cadbury for chocolates.

This kind of a portfolio could have companies like Asian Paints, ITC (owner of Wills), Zee Telefilms, NIIT, Blue Dart Express, Archies and Tata Tea. This gives investors a diversified portfolio, although investments are likely to be concentrated in growth stocks.

Or, consider a fund, which invests in a combination of sectors and thus, reduces the risk associated with investments in a single sector or industry. At the same time, the fund will not have an exposure to more than two or three sectors in the equity markets. For instance, a fund may invest in a combination of pharma and FMCG or FMCG and information technology stocks.

In the Value Research category of specialty funds, as many as three funds are dedicated to multinational companies. These companies are either more than a 51 per cent subsidiary of their global parents or Indian companies, with overseas operations. These companies could also be earning a significant portion of their revenue from exports like software firms.

Risk versus returns
Since most of the specialty funds have not completed even one year, it is difficult to present a risk-return picture with certainty. Ideally, a specialty fund should be less volatile than a sectoral fund while giving higher returns than a diversified equity fund. However, with technology being the flavour of the day, most specialty funds are loaded with information technology stocks and so volatility is a natural corollary. Of the eleven specialty funds, nine funds have invested in technology stocks with an average exposure of over 40%.

In fact, most of these funds also hold concentrated investments in a single technology stock like Canexpo, which has invested almost 40% of its assets in Infosys Technologies alone. Nonetheless, the relatively diversified portfolio has still helped specialty funds limit their losses in the ICE meltdown. To give you an insight, in the last three months, specialty funds (although not strictly comparable) have given an average return of (-)5.02% while Value Research Technology Fund Category has seen an average decline of 16.61%. On the other hand, diversified equity funds have lost roughly 7% in the same period. So, who should be investing in a specialty fund? You already own a diversified equity fund, which is doing just fine for you. While you are willing to take a higher degree of risk, time has not yet com to commit to a sector fund. Well, a specialty fund will fit your investment bill.

However, as has been said above, the choice of the theme solely rests on you. But remember most specialty funds have a sizeable exposure to technology and hence, they could be volatile. In case you want to steer clear of the technology theme, then Alliance Basic Industries and Magnum Contra are the other alternatives. So, from a basket of MNC to services to funds dedicated to export-oriented units, take your pick!

Value Research