Only few months ago, it looked as if days were numbered for diversified equity funds. However, in just a few weeks, these funds have come back roaring. It is this situation, which offers both an opportunity and threat. You can benefit from the opportunity only if you are a disciplined investor, focussed on your financial goal and follow a simple strategy - invest regularly. The threat is that the wild gyration will often tempt you to act and distract you from your goals. Yet another mistake investors make is that they work hard in trying to forecast sectors of the financial markets.

It doesn't always work. To benefit from equities, build a diversified portfolio of stocks or invest in a diversified equity fund. These funds help you own a diversified portfolio of varied businesses with great convenience. Besides, the diversified portfolio significantly reduces your risk by spreading your money around in a reasonable way to profit from the rises and avoid being crushed by the declines.

However, there are few truly diversified funds and instead they are more aggressive and concentrated. The aggressive funds are heavily concentrated in few sectors especially technology stocks. Few funds have stretched to technology stocks so become close to a technology fund. ING Growth portfolio is a case in point. While chasing growth, the fund is 85 per cent in tech stocks as on August 31, 2000.

Here is a sample of the scary performance of the tech heavyweight funds in a brief period - Magnum Multiplier Plus (-63 per cent), Magnum Equity (-62 per cent), ING Growth Portfolio (-61 per cent), IL&FS Growth & Value (-54 per cent), Alliance Equity (-53 per cent) and Birla Advantage (-49 per cent) during the ICE meltdown between March 7 and May 24. Now consider the fall during the same period in some of the technology funds by the same AMCs: Magnum IT (-75 per cent), IL&FS eCOM (-72 per cent), Alliance New Millennium (-60 per cent) and Birla IT lost (-52 per cent). Clearly this doesn't reflect prudence.

Surely technology is a compelling growth story. And helps a funds chase performance, because that results in easy marketability and brings fresh inflows. But investors have also been as much tempted to chase performance. But how much should you bite. There is no hard and fast rule as to how much of tech an average investor should own because each one of us has a different situation.

But one-third allocation to tech should be just fine for most of the people. While, a slight upgradation can do for young investors with a long time horizon, investors with a low appetite for risk should consider a lower stake in tech sector.

Will tech stocks rule forever? Don't count on them. The truth is, sectors rotate. And they usually make their most abrupt changes just when investors have concluded that a new permanent order has set in.

The best way to avoid being steamrollered in the rotation is to stay diversified - and to rebalance. And here the funds in minority in the diversified fund category present a good investment case - Kothari Pioneer Bluechip, Templeton India Growth, Sundaram Growth and Reliance Vision. If you hate technology there is just one fund - Zurich India Capital Builder Account. Though the fund owns NIIT one another tech stock to the extent of 5 per cent of the portfolio. But the fund manager likes them for the franchise and cash flows.

Diversification reduces risk
Diversification for an equity fund would mean building a portfolio that includes securities that are not affected by the same set of variables. For instance, information technology, pharmaceuticals, consumer goods, banking, oil & gas, automobiles, cement, steel and aluminum are completely different businesses. Depending on the country's economy, the trick is to find stocks that do not move in tandem at the same time. When you diversify, ou try to ensure that at any given point of time, if a part of your portfolio is down, a larger part of your holdings should be up and overall, your portfolio is doing fine.

A broadly diversified portfolio across sectors, capitalisation and style is guaranteed never to be the best in any year, but will also never be the worst. Such portfolio will show fewer downside risks than a concentrated portfolio. When we talk of risk, it is the uncertainty about the future and the possibility of going wrong in predicting it, which is too large to be dismissed. So when you diversify, you largely insulate from any wild shocks from your portfolio.

The right strategy
Even though most diversified equity funds today resemble technology funds, there are still many funds that have stuck to the diversification theme. Before jumping on the equity fund wagon consider your objectives and the time you have. Then look for the fund that follows an investment strategy, which suits your requirement.

This is easily decoded with the funds sector allocation. After taking into account the past performance, the allocation to various sectors and stocks would be a fair indicator of the fund's diversification. Going further, if the fund changes its investment strategy during your stay, one should reconsider whether the realigned strategy is within comfort levels of risk.

An interesting but cumbersome way to custom diversification of your portfolio will be to buy few sector fund in the ratio you decide. The only problem in this strategy is that it will solely be your responsibility to realign your portfolio. And it may not be tax efficient.

Value Research