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Sector funds - Do they offer better performance?

Dhirendra Kumar

With mutual funds on the forefront of the savings arena, every other day a new fund is being launched. Currently, over a dozen open end sector funds are available with few in the pipeline. With so many similar investment opportunities available at one go, these funds are likely to gain your attention. And you will be faced with the same old question. Are new funds worthwhile, or even superior investments? Next, how good are specialised or sector fund's?

With my conventional investment wisdom, I have always warned investors to steer clear of new mutual funds and to stay with funds that have established track records of three years or even longer. But an investor who followed that advice today would be forced to ignore 66 of the 101 open-end fund that have been established during the past three years --including 31 that are less than one year old.

At the very least, their performance in recent years merits further study. I took a closer look at the numbers for you to make a more-informed investment decision. The key finding is that new equity funds have higher returns than their older peers in recent period. This higher return, however, has been driven by greater risk-taking on the part of 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. As a sector fund 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 or optimistic forecasts for the sector and build the 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 companies 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. In other words, don't buy a new fund just because it's new. Consider a new fund if you like a particular sector, then the fund manager with an established track record, or if a new fund is managed with a style that matches your objectives and fits within your existing portfolio.

Sector Fund

Fund	Return		Launch Date	Size Rs (Cr)	NAV	Minimum Investment
	3 months	1 Yr.
Canexpo	16.9	124.46	03-1994	31.46	18.99	1000
Tata Core	14.35	96.35	05-1996	13.59	15.44	5000
KP Infotech	44.53	256.27	08-1998	119.54	42.01	2000
Pru ICICI FMCG Fund	-3.06	-	03-1999	103.48	11.02	5000
KP FMCG Fund	1.95	-	03-1999	30.74	11.87	5000
KP Pharma Fund	28.51	-	03-1999	45.40	13.27	5000
Tata Life Sciences & Tech Fund	10.96	-	06-1999	34.96	13.16	5000
UTI Brand Value Fund	-	-	06-1999	20.16	9.96	5000
UTI Petro Fund	-	-	06-1999	8.45	10.49	5000
UTI Pharma & Healthcare	-	-	06-1999	22.43	12.19	5000
UTI Services Sector Fund	-	-	06-1999	4.98	10.25	5000
UTI Software Fund	-	-	06-1999	22.73	14.66	5000
Magnum Contra Fund	-	-	07-1999	25	12.50	2000
Magnum FMCG Fund	-	-	07-1999	12.00	11.17	2000
Magnum IT Fund	-	-	07-1999	75.00	21.90	2000
Magnum Pharma Fund	-	-	07-1999	25.00	12.83	2000

Mutual Funds

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