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Suresh Krishnamurthy

INVESTORS in UTI Petro Fund can stay invested. The fund's NAV has declined sharply in the wake of the Government's decision to put off disinvestments in the oil-refining sector. Stocks such as BPCL and HPCL, the fund's mainstays, dipped more than 30 per cent in this period.

However, the valuation of the stocks in this sector has now become attractive after the sharp fall in price. In this backdrop, it may be better to hold on to the holdings.

Fresh investment in the fund may, however, be avoided right now. Further negative developments on the disinvestment front could lead to another bout of selling in these stocks.

In this backdrop, fresh investments can be contemplated after the disinvestments outlook is clear. But if there is a further sharp fall in price of these stocks of 10-20 per cent from the present levels, investors can use the opportunity to invest in the fund.

Suitability: Sector funds are suitable only for a portfolio with a more than average risk profile. To maximise the return on sector funds, investors have to frequently trade on their holdings, depending on the price levels of stocks in the sector.

Without such active trading the return on an investment in a sector fund may not be commensurate with the risk involved over a longer period. On the other hand, the risk involved in an investment in the fund is enhanced by the need for active trading. In other words, this fund is not a suitable investment for first-time investors in the stock market or investors with a conservative risk profile.

Performance: The fund's performance since inception has been impressive. Since June 1999, the fund has delivered compounded annual returns of around 23 per cent. This is substantially higher than what market indices have delivered over the same period. In the last 12 months, the returns have been of the order of around 87 per cent.

This is despite the steep fall in the net asset value of around 14 per cent in the last 3 months.

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