The Hindu Business Line : Sector funds with broader themes provide substantial diversification

TILL some years ago, you could not have chosen a fund that allocates primarily to banking stocks, or one that has an overwhelming part of its portfolio invested in oil companies. Today, these are a reality, and what is more, the number of such sector-specific options is on the rise.

However, what are also escalating are funds that are trying to cotton on to far broader themes - infrastructure and services being two of them.

Do infrastructure or service industries funds actually have a relatively limited universe? Should these be avoided by investors who look for truly diversified options? Or, are they really quite broad based in nature, enough to have portfolios that comprise a wide range of stocks selected from diverse areas.

A look at some of their portfolios suggests that these funds have invested in stocks representing a variety of industries. Mind you, it is not that their allocations have in any way transcended the originally stated objectives. But their range has been quite impressive all the same. The end result is simple: Substantial diversification.

Fund circles will probably defend it all by saying that investors who have entered say, a services industries scheme, are aware that its portfolio will be tuned to, well, stocks representing various services sectors. Here, the fund manager is picking stocks from areas as diverse as banking, healthcare and information technology. And, in the case of an infrastructure fund, the selection may well include cement and steel, coal and oil, telecom and housing. Yes, that is quite an assortment.

Seen against a pure (and not-so-narrow) sectoral play, a semi-diversified approach will make investors somewhat less susceptible to risk. A genuine petro fund may, at the most, invest in the Petronet LNGs and the Gujarat Gas Cos of the world. Imagine a fund that also invests in power/power equipment companies besides dabbling in metals, financial services and even media & entertainment. Get the picture?

That asset management companies are increasingly becoming active on this front is clear from recent initiatives mounted by the likes of Tata MF and Prudential ICICI MF. Now, Principal MF's latest proposal has gone a step beyond. It has worked out a scheme that actually seeks to combine the best of both worlds. As it is clear from the name, the proposed Principal Infrastructure & Services Industries Fund will chiefly invest in stocks of companies from these two areas. Normally, at least 70 per cent will be invested in equity and equity related instruments.

At the end, let us turn to what will appear to the regular reader as a favourite topic of ours: Churn. This time, a word of caution has come from Mr Sameer Kamdar of Mata Securities. "Churn the distributor who churns your portfolio regularly," is his considered opinion. He also urges investors to have a long term view while entering equity funds and not switch into well-marketed NFOs without solid reason to justify such switches.

After all, they will be better off investing in existing equity funds, ones with a proven track record and good dividend history. Shall we say `Cheers'?

Feedback may be sent to nilanjan@thehindu.co.in

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