Mutual funds riding the theme wave

Investors lapping up idea-based products

The domestic mutual fund industry is always in search of new "themes" or product ideas to attract investors. And more often than not, theme funds launched at appropriate times have mobilised sizeable amounts in their initial public offers.

The latest example of such a fund is the HDFC Core & Satellite Fund, which is reported to have garnered about Rs 400 crore in its IPO which closed on September 10.

Another innovative product that has just been launched by LIC Mutual fund is the Floater MIP and the fund house expects to garner upwards of Rs 500 crore in the new scheme.

But do theme funds deliver? Let us take a close look at some of the funds launched in the last four months when the equity market was in the doldrums.

In equity funds, two recent themes that have been in the vogue are 'Leadership' and 'Valuation'.

While DSPML Tiger Fund and Sundaram Leadership Fund belong to the former category, Tata Equity P/E Fund and Prudential ICICI Discovery Fund belong to the Valuation category.

Apart from these theme funds, there are new launches of sector funds such as the UTI Banking Fund, Reliance Pharma Fund, JM Auto Sector and JM Healthcare Fund.

One factor common to all these funds is that all of them had been launched in the last four months in the atmosphere of despair in the markets.

A look at the performance of these funds shows that net asset values (NAVs) of all funds in the list, except the UTI Auto Sector and UTI Banking Sector fund, are considerably above par as on September 17, 2004.

While the Tata Equity P/E Fund had the highest NAV of Rs 11.41 in the set, DSPML Tiger Fund is a close second with its NAV at Rs 9.96. It has delivered a return of 13.10 per cent since inception and has performed consistently well.

The UTI Basic Industries Fund has also outperformed its peers from the same fund house, UTI Banking Sector Fund and UTI Auto Sector Fund, both of which have shown negative returns since inception.

In the last week, however, owing to the market uptrend, all the funds posted decent returns ranging from Tata Equity P/E fund's 3.13 per cent return to 0.73 per cent by the UTI Auto fund.

Industry sources said that both the Leadership and Valuation themes always work for a fund whether it is a bear or a bull market.

Fund managers said that equity market downtrends provide the right opportunity to pick up quality stocks which are available at or near their historic low P/Es.

The Valuation theme supporters argue that at such levels, the downside to the valuations appears limited while the upside potential is immense.

This argument also holds true for Leadership theme because they are usually globally competitive companies, which if bought at appropriate valuations in a bear market can outperform over the medium to long term.

Similarly in a bull market, they can be equally powerful ideas as when valuations run up, funds with an orientation towards valuation based risk management and those with leading stocks in the portfolio can both outperform.