What are specialty funds?
As the name suggests, these funds have a special theme governing their investment charter that would encompass an amalgam of sectors. A portfolio built around these funds would not only be diversified across sectors but also across capitalisation and styles. While specialty funds were also launched in mid-1990s, the category has come of age only in the recent past.

For instance, you had funds like UTI Mastergrowth, which was to invest at least 50 per cent of its corpus in public sector undertakings (PSUs). Other instances are Prudential ICICI Power and Tata Core which intended to invest in sectors of energy, communication, transportation, financial services, etc.

We also saw the launch of Taurus Newshare at the peak of the IPO rush in 1994. As the name suggests, the fund was aimed at investing in IPOs and exiting the companies on listing. Although some of these funds did manage to raise a large chunk of money, they left a gaping hole when it came to performance. As a result, most of them were forced to change their original themes of investments and instead, put money in the hot sectors of the day.

One instance is Tata Core, which was converted into Tata IT Fund last year. However, the new generation specialty funds are backed by asset management companies with proven stock-picking abilities. With an active management, some of these funds have yielded decent returns in the brief history since launch. For example, Alliance Basic Industries, which is largely spread across stocks from the engineering and financial services sectors, and UTI Brand Value with investments in FMCG, media and technology stocks.

An MNC fund like one from Kotak will invest only in Indian subsidiaries of multinational companies. Thus, if you are bullish on the prospects of a couple of sectors, a look at the objective of these funds could yield the desired combination. You can also own a fund like Magnum Contra or DSPML Opportunities. These funds invest in undervalued stocks or sectors, which have the potential to bounce back on the bourses. Further, you can also have your pick in a fund that invests in export-oriented companies, which could range from sectors like textiles to information technology and pharma to heavy engineering.

Strategy
An ideal strategy for an investor would be to have a core portfolio spread across these funds. If an investor has a strong conviction about a particular sector, he could supplement the core portfolio with a sectoral fund. However, if your sector fund appreciates to take a large chunk of your investments, it is important to rebalance the portfolio. That would be the key to holding a diversified portfolio.

With calendar 2000 proving bad for the equity markets, most speciality funds have failed to perform. However, the average returns from this category have more or less tracked Nifty total return index (S&P CNX Nifty adjusted for dividends). While it is well known that equity investments reap rewards only in the long-term, an association over the long haul with speciality funds should also stand you in good stead.