Infra structure, real estate, global funds-Are the sector specific funds true mutual funds?

The biggest advantage of mutual funds is getting decent return on one's investment without having to go through the complexity of investment management oneself. You write a cheque and that's that. After that, which sector or industry is doing well or badly and what to move in or out of is no longer your headache. All that is the fund manager's problem. In fact, this offloading of decisions to a professional fund manager is the whole point of investing in a mutual fund.

However the recent NFOs provide a completely different picture. The theme-based funds (maximum of NFOs are theme based) defeat the three very basic ideas of investing in MFs – diversification, professional expertise and regular monitoring.

Firstly, you are concentrating your portfolio and thereby increasing the risk. MF was supposed to be a route to diversify investment, not concentrate it.

Secondly, you are taking a call on the market as to which sectors will do well. You have entrusted your money to a professional fund manager. Don’t you think you should invest in a diversified fund vis-à-vis a sector fund and leave it to his expertise and experience to decide on the potential sectors (in fact, that’s precisely his job)?

Thirdly, since you don’t know when the tide will turn, you need to constantly monitor a theme-based portfolio. Again, you have opted for MF, as you didn’t have much time to regularly monitor our investments.

During November and December so far, 11 new equity mutual funds have been offered to the public. An interesting aspect of the NFOs this time is that they are predominantly sector or theme specific. The current fancy is infrastructure, real-estate and global funds.

Out of all the NFOs one-exactly one-is of the type where the fund manager will be taking the entire gamut of investing decisions. In all others, the investor will have to lend him a helping hand.

Almost all funds that are launched nowadays are specialised in some way. There are real estate funds, energy funds, small companies funds, emerging marketing funds, and so on and so forth. Per se, there's nothing wrong with the idea of specialised funds.

However, when almost the entire market for mutual funds gets converted to specialised funds, then there's a problem, because deciding between these funds is a job by itself. When you invest in a well-run generic equity fund that can invest in any kind of company, then it's the fund manager who decides what type of sector, industry or size of company to invest in. It's his job to analyse trends and figure out how much of your money needs to be in technology or oil companies or infrastructure or real estate or whatever. But when you invest in specialised funds, then that analysis and that decision has to be made by you. You must take a call on what percentage of your investments to put in what industry and when to put it in and when to pull it out and switch to some other industry or type of company. Does this sound like a good deal to you? It doesn't sound like one to me.

Theme-based funds-what’s wrong?

Interestingly, one of the guidelines on NFOs was that an AMC cannot launch new funds which are similar to any of their existing schemes. Most AMCs already have the conventional diversified and mid-cap funds. Hence, this rush for sector/theme-based schemes! (By the way, some of the so-called theme-based funds are so broad-based that they mimic a diversified fund; the fancy-named NFO being just a marketing maneuver).

But the problem is you don’t know when the fancy starts or when it ends. It could be months or it could be years. So you could either exit too early and miss the best part of the rally or exit too late when all the cream is gone.

Time and again, something or the other will catch the fancy of the market. And then everyone will rush headlong into it. Once upon a time it was Technology, Pharma or Auto. Today no one even talks about them. Now it’s infrastructure and real estate. Tomorrow, they too would be forgotten.

Given all this, theme-based funds carry a higher risk than diversified funds. However, if you are keen in investing, it would be prudent to invest only a small percentage of your corpus in such sector/theme-based funds.