Service industry Funds – Excellent growth potential

A unique investment theme in mutual funds is services industries. These funds fall under the category of theme funds, primarily investing in industries such as information technology, banking, entertainment and media, telecom, financial services, retail, engineering and construction, transport and travel, and so on. Service industries funds have shown strong performance in the recent past. They are a better investment opportunity than most sectoral and thematic funds.

Today, the service sector is the chief driver of India’s economy, contributing almost 55% of GDP. The agrarian Indian economy has altered dramatically in the past decade with agriculture at 20% of the GDP, in third place behind services (55%) and manufacturing (25%) a far cry from the 1990s, when it accounted for over 60% of GDP. This reflects the consistent and fast growth of the services sector.

Amongst service industries, information technology is a big success story, with companies like Infosys, Satyam, TCS, and Wipro among top IT solutions providers worldwide. India’s low cost and highly skilled workforce force with a strong command of English has stood this sector in good stead.

Another industry contributing heavily to the growth of services in India is the business process outsourcing (BPO), which leverages the strong talents of the Indian workforce and accounts for several billion dollars of exports annu9ally. India has merged a leading player in the BPO industry, offering various services, including customer support, technical support services, insurance processing, data entry services, medical services and so on. IT and BPO accounted for more than 20% of the India’s exports in 2006-07.

Amongst other services, insurance banking and financial services have also shown strong growth. Several banks, including State Bank of India, ICICI Bank, and HDFC Bank, have expanded rapidly hoping to gain from the rising affluence and savings of India’s middle class. Companies and banks offering financial services to millions of Indian and NRI customer shave registered growth in revenues and earnings. Insurance has also undergone a sea change in its dynamics with new private sector companies, besides the state run LIC, to vastly increase the size of the insurance business in India, with new products and higher penetration.

Telecom services, including mobile and fixed telephony and broadband services, have been witnessing the fastest growth around the globe with the subscriber base jumping exponentially over the past few years. In fact, such is the growth of the Indian telecom sector that global telecom majors are compelled to pay billions of dollars for a stake in the Indian companies, as Vodafone recently did for a controlling stake in Hutchison Essar.

With service industries relentlessly increasing their share in India’s GDP, companies in this sector are showing faster growth than agriculture and old-economy industries with a more stable and matured growth cycle. The valuations of service industry companies reflect their strong earnings growth, and offer better return potential to investors and shareholders alike.

The service industries theme is not new in India: UTI launched the first such fund in 1999. Principal Infrastructure and Services Industries Fund only partly follows the theme, with a majority of its corpus invested in infrastructure stocks.

The cumulative corpus of the service industry fund pack, at around Rs 1,500 crore, is relatively small, and forms only about 1% of equity assets managed by Indian mutual funds. However service increasingly popular among investors in the past year, and assets under management doubled during this time.

The recent performance of service industries funds has been impressive, as they averaged a 40% return during the past year, as against the 40% gains in the Sensex in the same period. Among the three service industries funds ICICI Prudential Service Industries Funds stands out with an astounding 59% jump in NAV during the past year. The fund scores high in terms of the risk adjusted returns, too, being the only one of the three funds to beat the Sensex on that score. Interest in services industries stocks is only recent.

Investors who have already invested in service industries fund must consider holding for the long term. For an investor interested to invest in theme funds, service industry funds are a good option, as they cover the faster-growing sectors of the economy. If an investor is shy of risk, diversified equity funds are a good bet, as they, too, have service industries stocks in their portfolios.