Whenever the markets go up, fund managers come up with new products to cash in on the boom. But that, by itself, beats the real reason for investing in mutual funds for long-terms returns.
Let us take the example of technology boom in the late nineties, which lead to the introduction of technology funds, the first one by Kothari Pioneer in the late nineties, now known as Franklin Templeton Infotech Fund.
Following that, many technology funds were introduced, as the software firms like Infosys, Wipro, Satyam and many smaller firms did well. However, if one had invested in any of these funds in 2000, one should still be finding it hard to accept that the returns can be so low, that too, after many long years. And that is in spite of the spectacular run on the markets in the last few years.
The idea of investing in sector funds is to take advantage of sunrise sectors. However, one does have to remember that it is fraught with high risk as well.
One would do well to exercise some caution or if risk-averse, it is best to avoid sectoral funds altogether as a part of your portfolio. Here are some numbers that reflect the performance of the technology funds over the last seven years.
As the story goes, in early 2000, aggressive fund managers and even some diversified fund managers were the talk of the town as they were able to come up with fantastic returns in a very short period of time.
An investor would be considered old-fashioned, if he wasn't exposed to tech funds or stocks. And there was no mention of 'risk'. IT stocks hit an all-time high on March 7, 2000 and so did NAVs of technology funds. The NASDAQ followed suit and crossed the all-time high of 5000 points mark on March 10, 2000.
But that was just euphoria that was driving the market. Then started the downturn of IT stocks due to various reasons, which today is a part of stock market history.
By 2002, the meltdown was at its peak and as the table shows that if the net asset value of a mutual fund of Rs 10 is considered sacrosanct, then some these funds' NAVs were languishing at as low as Rs 3, thus losing at least 65 per cent during this meltdown.
If one were to summarise the losses after the technology bust, a normal diversified equity fund that was heavily into technology companies (say about 40-50 per cent) had lost an average of 40 per cent in just a year. Considering there were 77-odd equity funds which included several sector schemes as well, there were only three gainers.
It is surprising that while the losers, mostly technology or technology heavy funds incurred losses to the tune of 70 per cent (UTI Software lost around 75 per cent), another sector fund, though from a different sector, UTI Petro0 topped the chart with a 86 per cent gain.
Most of the SBI funds which were tech heavy at that time were big and prominent losers. Four of their schemes namely Magnum Equity, Magnum Multiplier Plus and Magnum IT lost an average of 71 per cent.
Many of technology funds are yet to recover for those days. For instance, even after seven years, the NAVs of Magnum IT is nowhere near its earlier high. So when a fund house touts its current heroics, an investor should not only look at current performances but also at the past performance.
Examples like these would actually make it clear to the investor that in lines like 'mutual funds will give great returns in the long run' can go horribly wrong when one invests in one kind of the product. It is during such times when investors appreciate terms such as risk, aggression, processes and concentration impact you.
Remember that a sector fund or even a sector-heavy scheme should never be the core of your portfolio. And if you like risk-taking, then make sure you limit this exposure to only 10 per cent of your portfolio.
The writer is director My Financial Planning.
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