The performance of some funds such as Alliance Basic Industries Fund and Prudential ICICI Power has been rather good in the recent times. As the core sector contributes significantly to the GDP and is continuously growing, this sector should do well. Should I invest in funds with this theme?
Namrata Rajadhyaksha, via e-mail The funds that you have mentioned work around a theme on which their investments are based. Prudential ICICI Power focuses mainly on core sectors of the economy such as telecom, energy, transportation and financial services. Alliance Basic Industries, on the other hand, invests in companies sensitive to economic and commodity pricing cycles. But before you make any investment in such funds you ought to have a clear idea about their investment pattern.
Theme funds, though diversified, have a restrictive view of the market based on their investment theme. Diversification helps these funds to be less risky than pure sectoral funds. By characteristic, these funds are bound to do well during a particular phase of the market when particular sectors do well. For instance, when the economy is doing well, cyclical stocks do well and so do the funds with have these holdings in their portfolio. Thus, these funds are purely based on the performance of a 'subset' of the market.
Though the service sector today accounts for a sizeable percentage of the GDP, it doesn't mean that the market will always place a premium on this sector. Stock markets are cyclical in nature and sectors move in and out of favour. A pure diversified fund gives a fund manager a chance to tap all growth opportunities in the market. In that sense, a pure diversified fund should form the core of your equity portfolio. But this is not to suggest that you shouldn't invest in theme funds. What we are saying is that these funds should find a small allocation in your portfolio.
Besides that, the name of these funds should not misguide you. Prudential ICICI Power and Alliance Basic Industries tend to give an impression to investors about their investment strategy. Don't forget the disclaimer—'the name of the scheme does not in any manner indicate the quality of the scheme, its future prospects or returns'. The bottomline basically is don't concentrate too much on the theme of a fund but look at its portfolio holdings and performance more closely.