Sectoral funds or equity diversified funds?

Mutual Funds | admin | June 18, 2011 at 8:59 am

Your flight hovers a little too long, waiting for a landing slot; the power goes out while you are in a lift; there's a traffic jam every day on the way to office. All of us are reminded every day – several times a day actually – of the huge gap that exists between the kind of infrastructure India needs and the kind it has.

Logically, our infrastructure sector should have been a great place for investors to make money. All the variables are there. There's the demand, the customers have a capacity to pay, the funds are available and so, apparently, is plenty of encouragement from the government. For mutual fund investors, there are plenty of products to help them participate in the sector (29 funds from 22 asset management companies currently).

However, the actual experience of these investors has been horrible. At this point of time, of the 12 equity categories in the Value Research's taxonomy of funds, infrastructure comes at the bottom. The average three-year returns of infrastructure funds stand at -1.4%, or an accumulated total loss of 4.2%. Compare this with categories like banking, which have gained 15.8% per annum with an absolute gain of 55% over the same period.

While something like banking may be an exception, even the mainstream multi-cap category (where funds invest across industries and capitalisation bands) has given returns of 5.2% a year during the period for a total return of 16%.

What makes the story of infrastructure fund investors specially disappointing is that unlike some fund categories, this is not a small group of funds with marginal assets and implicitly, a relatively small number of investors. These 29 funds between them have 15,520 crore in assets, as against the 2,786 crore in banking funds and 444 crore in technology funds.

Moreover, a bulk of these funds was launched during the great bull run between 2005 and 2008. What has happened is that investors have rushed to infrastructure and have then faced a slump in a cycle of huge hype and depression.

There are many definitions of infrastructure but in one way or another, almost everything, except infotech, FMCG and pharma, can be lumped under this heading. The government itself defines infrastructure in a bewildering variety of ways, and fund managers, too, have tried hard to broaden the definition as much as possible. Banking and telecom as well as "companies that will benefit from better infrastructure" are routinely included.

However, for mutual fund investors, there is a lesson. Many may feel there is something wrong with this sector in particular. Even if there is, that's not the key takeaway. The key takeaway is that the very concept of investing in sector funds is flawed, even for a sector as broad as infrastructure. Purveyors of investment products always find that investors respond well to stories about specific sectors or themes. We've seen this happen with technology, infrastructure and with commodities among others.

However, almost by definition, a story that sounds convincing and in fashion at one point will go out of fashion at some other point. Moreover, when a story is current, its negative points get ignored and wished away. Both these have happened to infrastructure funds. It's entirely possible that a lot of infrastructure will get built but some infra companies themselves and their investors will never make much money. Others will need a really long haul and much patience.

None of this would matter to fund investors if they were to use funds the way they should. Don't take your own decisions about which sectors will come good when. Just choose a set of good diversified funds and let the fund managers spend sleepless nights, worrying about sectors and stocks.
Source: Economic Times