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Diversified funds offer good hedges

With Bombay Stock Exchange climbing new peaks, analysts are expecting a shift in market dynamics, thus mandating a change in investors’ portfolios, reports Vyas Mohan.
Hindustan Times | By Vyas Mohan, Mumbai
UPDATED ON JUL 06, 2007 10:02 PM IST

With the Bombay Stock Exchange’s 30-stock sensitive index (Sensex) and the broader Nifty of the National Stock Exchange climbing new peaks, analysts are expecting a shift in market dynamics, thus mandating a change in investors’ portfolios.

Market experts, however, stand divided on the sector outlook. For instance, while a section of market experts a bounce-back rally in information technology in the days to come, others feel that the growth curve of infotech stocks has started to flatten out.

“Business volume is growing at a fast pace in infotech companies and that could help them potentially relieve the dent on profits caused by the rupee’s appreciation,” says Lalit Thakkar, managing director of Angel Broking.

A technical analyst has a different view. “The growth curve of infotech companies has started showing signs of sluggishness. Growth in these counters could be slow,” he says.

Thus, with indices at levels never seen before and amid diverse opinions, what should a retail investor do?

The nature of the rally has been narrow, feel fund managers. Thus investors should reduce their direct exposure to equity and choose mutual funds, they say.

“The bounce-back rally after the fall in February has been narrower, and picking the right stock has been very difficult. The trend is likely to continue. It would be wiser to put money in mutual funds in situations like these,” says Prateek Agarwal, head of equities at ABN Amro’s fund business.

The obvious question follows what sort of mutual fund? Though sector-specific funds that invest in shares of banks and technology companies have delivered the highest returns in the past year, it may not be wise to depend on sector-specific funds from now on.

“There is some amount of predictability in the market and it makes stocks expensive. Under such circumstances, sector-specific funds will be risky as there can be various factors that can spoil the party. One should look at diversified equity funds where the risk is spread across sectors and there is flexibility in stock selection,” says Sandesh Kirkira, CEO of Kotak Mutual Fund.

In the past year funds that invested only in banking and technology stocks have topped the gainers’ list among mutual funds, according to data available on

While banking funds delivered returns of 78 per cent in the one-year period, technology funds grew by 52.89 per cent. These were followed by other speciality and diversified funds that gave returns of 51 per cent and 41 per cent, respectively.

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