Sectoral funds are back in the reckoning

Sector funds are back!
When the markets tanked following the global financial meltdown, most experts had gone to town with the advice that investors diversify their equity investments than stay put with bets on specific sectors.

They couldn’t be more wrong, one can say with hindsight today. Over the past year, mutual funds focused on pharmaceuticals, fast-moving consumer goods (FMCG) and technology companies have done better than the equity diversified funds and tax-saving mutual funds, where the fund manager invests across sectors.

In fact, more than half of the top 20 funds based on one-year return as on July 4, 2010 are from the sector funds category, according to data from Delhi-based Value Research India.

The top three funds are from the pharma sector, with Reliance Pharma giving the best returns (104.71%), followed by Franklin Pharma (88.74%) and UTI Pharma & Healthcare Fund (70.98%). 

On an average, pharma funds have delivered 82.41% returns, while FMCG funds have given 62.81% and technology funds 55.62%.

Compare this with the modest 31% returns equity diversified and tax-saving mutual funds, also called equity linked-savings schemes, have given.

Mutual funds are investment instruments that allow one to park money at one go or regularly each month, to be handed over to a professional investment manager for a fee. One can invest as low as Rs 100 a month.

Sector funds, as the name suggests, are mutual funds devoted to a particular sector.

But, the returns notwithstanding, say experts, there are several things to consider before reaching for sector-specific funds. 

“You are looking at it when they are at the top of the pack. But there are a good number of times they are at bottom,” says Dhirendra Kumar, chief executive officer of Value Research India, an independent mutual fund research provider. 

Also, he says there is a risk attached. “In a sectoral fund the decision is yours as you have given a limited mandate to the fund manager. Even if the funds are not in flavour the fund manager will invest in just that,” says Kumar.

“What do you buy a fund for? For diversification and stability of returns. So, at other times, it (returns in sectoral funds) will look disappointed,” Kumar says.

Many advisors still stick to their bets in funds that invest across sectors. Mumbai-based personal financial planner Raunak Roongta, say, “These sector funds do well in the bull run, but plain-vanilla funds will do well at all times. In a sectoral fund, there is a risk of the sector not being favoured by market.”

He elaborates with examples of oil and other sector funds launched in the past. “Oil sector funds were out of favour for a long period. Just a month ago they have come back. Pharma funds too were not doing well for three years. They started doing well only in the past year,” says Roongta.

He says you also have to be very cautious while getting out of sector funds. “It (certain phases in the sector) may wipe out the returns you have made,” he adds, suggesting large-cap or pure midcap funds are better off, where the fund manager has the liberty of choosing the sector.

Experts also caution that by the time some of the funds are launched or one realises that investing in a particular sector makes sense, the sector would have run up to some extent already.