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At Personalfn, we have never been advocators of sector/thematic funds. In fact, we have always considered them to be bugbears for investors and maintained that investors should stay away from sector/thematic funds.
Sector funds (which invest in stocks from a single sector like pharma or software) or thematic funds (which invest in stocks from multiple sectors related to a single theme like commodities or infrastructure) contradict the basic philosophy of mutual fund investing by depriving investors of the benefits of diversification across sectors/themes.
These funds typically tend to be high risk-high return investment propositions. At best, such funds are suited for informed investors i.e. ones who have a view on the underlying sectors/themes and can time their entry into and exit from the fund.
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The investment proposition offered by the NFO
Sundaram Rural India Fund is a thematic offering from Sundaram BNP Paribas Mutual Fund. Launched in March 2006, it mobilised Rs 12,200 m during the new fund offer stage. SRIF professes to generate consistent long-term returns by investing in companies that are focusing on Rural India.
SRIF works on the premise that the next round of growth in India will come from the rural areas. In many ways, the spending/consumption and infrastructure boom that is on display at present, will also embrace rural India. In effect, the rural sector has as much to benefit from growth in infrastructure and consumption as the urban sector.
Our view on the NFO
At Personalfn, our view was that there weren't enough exclusively "rural" listed stocks in the country. So any mutual fund that would target the rural economy for growth would have a very limited investment universe. Further, we stated that, "It (the fund) is more likely to invest in stocks that have a presence in the rural segment with the potential to grow going forward. It will invest predominantly in stocks that will gain in some way due to the growth potential of the rural sector. To that end, it is like any other diversified equity fund that invests across stocks/sectors, only that the stock/sector must have a rural flavour".
Clearly, we were not enthused by the investment proposition offered by the NFO. Hence our view was that investors should give the SRIF NFO a miss. Instead we had advised investors to invest in conventional diversified equity funds with proven track records.
We thought now would be an interesting time to put the fund's performance under the scanner and find out how it has fared so far. We have compared SRIF's performance with that of diversified equity funds with proven track records. Incidentally, some of these funds (like HDFC [Get Quote] Equity and HDFC Top 200) are the ones, we had then recommended to investors instead of SRIF.
|DSP ML Top 100 (G)||65.46||-3.2||13.3||41.1||54.5|
|DSP ML Opportunities (G)||62.75||-2.2||12.8||37.3||31.0|
|HDFC Equity (G)||167.49||-2.6||12.2||36.2||25.6|
|HDFC Top 200 (G)||124.39||-0.4||12.8||35.1||34.2|
|Sundaram Growth (G)||73.81||-2.5||8.8||31.4||25.8|
|Sundaram Rural India (G)||12.51||-2.7||8.7||23.6||19.5|
SRIF's performance on the net asset value (NAV) appreciation front has been modest at best. Over the last 12 months, SRIF's NAV has appreciated by 23.6%; it trails funds from the diversified equity funds segment by a significant margin. Also, the fund has failed to match its benchmark index i.e. BSE 500 (36.5%) over this time frame. Since inception, SRIF has clocked a growth of 19.5% CAGR (compounded annualised growth rate).
It must also be noted that SRIF has failed to match its fund house peer i.e. Sundaram Growth fund, a conventional diversified equity fund that invests predominantly in stocks from the large cap segment.
As can be seen in the graph above, Rs 100 invested in SRIF on inception would be worth approximately Rs 126 at present, while an investment in the benchmark index i.e. BSE 500 would have yielded Rs 120. It's noteworthy that over the last 12 months, SRIF has trailed its benchmark index.
It must be mentioned here, that these are early days for the fund. Ideally equity-related instrument avenues should be evaluated over a longer time frame (at least 3-5 Yrs). Furthermore, funds with a thematic/sector bias are known to perform in patches. The possibility of SRIF delivering an impressive showing when rural stocks/sector hit a purple patch cannot be ruled out. However it can be stated that in its existence so far, the fund's performance has been far from impressive.
What should investors do?
Should investors consider investing in the fund or liquidating their existing investments, instead? Well, that would depend on the investor's risk appetite, investment objective and existing portfolio, among a host of other factors. At Personalfn, we have always maintained that a 'one size fits all' approach doesn't work while investing. An investment avenue that is apt for one investor could be grossly unsuitable for another. Investors would do well to consult their investment advisors/financial planners to determine the suitability of SRIF in their portfolios.
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