The fund industry is planning to launch nine sector funds. Of course memories of the last time when there was a sector fund frenzy are not too pleasant. In 2000, Rs 3,000 crore were collected through eight technology funds were launched, a good chunk of which was lost to investors in the crash that followed. Even today, many of those sector funds haven't recovered there losses.
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While the last rally was lead by technology companies, the current bull-run is broad-based and this diversity is reflected well in the wide variety of proposed sector funds. Take a look at the accompanying table for details of these funds. It is interesting that UTI sees the need for yet another PSU fund in addition to Mastergrowth. And UTI Basic Industries is more of a theme fund that will invest in metals, building materials, oil & gas, power, chemicals and engineering.
Reliance too is doing something different, its sector funds are actually hybrids that can also invest—the full corpus if the fund manager sees it fit—into debt securities from the respective sector. Of course, since a sector's debt (unlike its stocks) does not systemically behave very differently from the debt market at large, the logic behind this arrangement is a little fuzzy.
Sector Funds: For Whom?
According to one school of thought sector funds should not have a place in the mutual fund scheme of things as they violate the basic tenet of funds investing, i.e., diversification. Due to their focused nature, sector funds represent the highest risk-return potential in the mutual fund universe. And highest risk does not necessarily translate into highest returns. Sector funds can thus produce tremendous gains or losses, depending on whether your chosen sector is in or out of favour. Sector funds can, however, be useful in some circumstances. If your portfolio is lacking in a particular sector, these funds can fill the void. Either way, invest in these funds only if you think you understand the relevant sector dynamics well. And in all cases do limit your investment to a maximum of 10-15 per cent of your portfolio.
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