While it is well known that mutual funds can be an excellent vehicle where seasoned money managers can help you benefit from the stock market, not many are aware that certain type of funds can be judiciously employed to spice up returns on overall equity investments.
Sector funds are one way to do this, especially if the investor has been able to get in at the right time, a little similar to investing directly in stocks.
Investors who had put money in Tata Infrastructure Fund, a sector fund that was launched in December 2004, should be happy with the fund posting returns of 53.46% (annualised) since inception.
This is an open-ended equity fund with a mandate to invest predominantly in equity and equity related instrument of the companies in the infrastructure sectors. The scheme can also invest in debt instruments for preservation of capital in a bear market.
Interestingly, with asset under management of over Rs 11 billion, the infrastructure fund is the largest among the equity funds managed by Tata AMC.
A sectoral fund allows the investor to bet on a particular sector, instead of the entire economy. The infrastructure sector in India clearly appears to be poised for accelerated growth in the coming years.
The country has already partly negotiated the difficult transition from public infrastructure creation to a market-determined model, at least in a few infrastructure sectors.
An ambitious reform programme initiated involving a shift from a controlled to an open market economy has opened doors for private sector and foreign investment in infrastructure projects such as energy, petroleum, telecommunications, transportation sector etc.
Though the Tata Infrastructure Fund with a return of 48.76 per cent over the last one year has barely managed to beat its benchmark Sensex return of 48.35 per cent, since inception the fund has bettered its benchmark returns of 44.16 per cent by a comfortable margin.
The fund has performed marginally below its category median (although there are only four infrastructure oriented funds) over the last 3 and 6 months.
The total assets under management have increased by 46.62 per cent over the last one year, lagging behind UTI Infrastructure, which has grown by 156.8 per cent in the same period.
The fund manager has been largely conservative in his portfolio selection by having a diversified group of over 60 stocks with an equal bias towards large cap and mid cap stocks. The top 10 stocks, however, comprise mostly of large cap stocks.
The contribution of the top 10 companies to the total portfolio has come down from 39.01 per cent as at September 2006 to 34.25 per cent as at December 2006.
Debt instruments, which did not find a place in the fund's portfolio during the first half of 2006, is at 4.13 per cent of the total portfolio as at the end of December 2006.
L&T, Grasim and ACC are the top three stock holdings while industrial capital goods, cement and construction are the top three sectors contributing 58.51 per cent of the overall portfolio.
While the fund has pared the contribution from industrial capital goods from 33.83 per cent as at January 2006 to 21.79 per cent as at the end of December 2006, the share of the cement sector has gone up from 12.64 per cent to 21.59 per cent over the same period, reflecting the fund manager's bullish view on the sector.
The key question when it comes to a sectoral fund, which can be quite volatile, is whether the tide is turning or not. When asked by myiris to comment on the overall policy situation with respect to infrastructure investments and the effect of rising interest rates on the current investment plans, this is what Ved Prakash Chaturvedi, MD and CIO, Tata AMC, had to say, ''There is such a huge demand for infrastructure in India.
The growth rate in infrastructure sector going forward could be as good as the past. Rising interest rates will certainly have an impact on the investment plans and will have to be watched closely. Large part of infrastructure borrowings has already been tied up.''
The portfolio is rather heavily valued with the price earnings multiple in the late thirties. However, the fund manager says the growth momentum of the stocks the funds hold is even better.
''We look at the growth rate while picking up the stock. If the ratio of price earnings to growth is good, then the stock is picked up. We certainly see stocks with good growth rate will deliver returns in future.''