Theme-based funds

In the mutual fund business, theme-based schemes seem to be the in-thing. While some MFs have tapped the market with such funds, others are on-going, while a few more are in the pipeline. And one recurring theme is the current market favorite –infrastructure.

UTI recently launched its Infrastructure Advantage Fund, while HDFC MF and Reliance MF have infrastructure products in the pipeline. Other sectors being focused on are real estate energy and banking. Sundaram BNP MF launched an energy fund, while ICICI Prudential MF hit the market with a real states securities fund. Lotus India AMC also plans a banking and infrastructure fund while J M Financial just launched an Agri and Infra Fund.

Investors are lapping up these offerings. Tata MF raised about Rs 2,200 crore through its Indo-Global Infrastructure Fund, while DBS Cholaandalam and SBI MF infrastructure funds, received a good response. So, with all these specific products available to the investor, the quantum of money one must allocate to theme based funds, keeping in mind that not too long ago sectors like IT looked unstoppable and one cannot say the same now.. Even auto stocks, which were doing well some time back seems lackluster today. For a fresh investor it is always wiser to start with a diversified equity fund. However, if one is investing for the long term infrastructure and power are more sacrosanct and can be included in a portfolio. Around 15-20% of the portfolio can be allocated to these funds.

A relatively new concept in Indian mutual funds scenario, a Fund of Funds aims at generating returns by investing in a portfolio of other mutual funds. Unlike regular funds, which invest directly in shares, bonds and other securities a Fund of Funds invests in the units of other equity or debt mutual funds or both. Thus, gains or losses from a Fund of Funds are directly proportional to the appreciation or decline in the NAV of the underlying funds. This method is also known as “multi-management”. Simply put, instead of trying to find the needle in the haystack, an investor can pass on this responsibility to a fund which will then invest in a host of other mutual fund schemes with a proven track record.

Some investors will reveal that like some of the more inexplicable movies, some investments appear to have no plot or plan. If the movie is really clever, towards the end it slowly dawns on audience that the bits and pieces are falling together, giving a clear picture and often leading to a stunning climax. Sadly, no spellbinding end awaits unplanned investments, or at least not one that makes an investor comfortable. More often than not, investor is left feeling repent, perhaps with a mild heart burn thrown in, and always the promise to make up for a past mistake.

The infrastructure story looks strong over the next couple of years as there is a lot of work to be done. To achieve the projected growth rate of 8-9% for the Indian economy, the country’s infrastructure must improve and be developed, so these funds are likely to give good returns. But not all analysts are sold on the idea. A theme-based fund can never be a core part of investor holdings. The out look for any sector can change at any time. It is recommended diversified equity fund for any investor for good returns. But an investor who is looking for little more risk and a little higher return could look at thematic funds.

As a proportion of an investor’s portfolio, thematic funds ideally should not exceed 10-15%. But this is investor specific and cannot be a blanket guideline. Each investor should evaluate the risk taking capabilities and then pick a fund based on investment goals. A lot of concepts look good on paper, but it boils down to an individual investor’s needs.