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NFO REVIEW

JM Financial's two funds are worth looking at considering the growth in the telecom and financial services sectors.

JM Financial Mutual Fund has launched two open-ended equity oriented sector funds "� JM Financial Services Sector Fund and the JM Telecom Sector Fund.

While the telecom fund is the only sectoral fund in the market, there are two banking sector funds from Reliance and UTI. With a plethora of diversified equity funds that invest in growth stories of financial services and telecom sectors, why is there a need for a separate sector fund?

An investment in a sectoral fund is justified if the market has underestimated the future growth potential of the sector and a focussed approach is expected to bring in the gains. Moreover, some fund managers believe that a limited universe of stocks helps manage the portfolio better.

Says Sandeep Neema, fund manager, JM Financial Mutual Fund, "Sector funds are good for investors to diversify their portfolio of mutual fund schemes "� they provide concentrated exposure to specific sectors and hence give an opportunity to participate in their growth." For JM Financial, the future stars are embedded in the banking and telecom sector space.

The credit revolution

The fund house believes that the banking sector is due for a re-rating because of increased cost efficiency, workforce reduction, credit growth, equity dilution and enhanced capitalisation, and a greater share of income from commissions.

While it is true that banks across the board have cleaner balance sheets and strong credit growth, any constraint on liquidity could impact their loan portfolios and growth.

The fund, however, does not limit itself to banks. Housing finance companies and non-banking financial companies are also part of the fund manager's universe.

India calling

The fund company's positive outlook on the telecom sector is based on the near doubling of cellular subscribers due to low tariffs, declining handset prices and wider geographical reach.

The increase in FDI limit to 74 per cent and the expected cut in licence fee for long distance business could lead to expansion and growth. However, there are just five listed entities (Bharti, VSNL, Reliance Communications, Tata Teleservices and MTNL) which the firm can invest in.

Says Neema, "While the number of service providers currently listed from the telecom sector is less, this universe would increase in future as more companies tap the capital markets to raise funds."

As opportunities for investment will increase, competition both in the pan-India level and at the state level is putting pressure on tariffs and squeezing margins.

Neema, however, believes that after achieving critical mass in the number of subscribers, the profitability of telecom players has improved. While there are no benchmarks for telecom sector funds, how have banking sector funds done over the last one year?

Returns

As on November 10, 2006 the Reliance Banking Fund launched in 2003 has given a 22 per cent return while the UTI Banking Sector Fund launched two years ago has given a 32 per cent return over the last year.

The banking sector funds have been at the bottom of the returns list for equity-based funds this year with a one-year average return of 25 per cent, while IT sector funds have given an average one-year return of 50 per cent.

However, sectoral funds are not known for consistent returns. Consider technology funds: after trading below their NFO prices till 2004, these funds have given the highest one year returns among all sectoral funds this year.

Four of the seven technology funds which were launched in 2000 when the markets were going berserk have underperformed their peers by a wide margin but over the last three years average returns for funds in the category have been close to 40 per cent.

Picking up a sectoral fund is not just about how well the sector is doing, it is also about when you catch the uptrend and which fund you bet your money on. The only indicator of returns is the fund manager's past record.

Track record

Sandeep Neema is the fund manager for both the funds. His record of returns has been mixed. While the Basic Fund (Energy and petrochemicals), Auto, Healthcare and JM Equity funds have given returns of 49, 31, 21 and 55 per cent, the Emerging Leaders and Hifi fund (launched in March) have given 11 and 7 per cent over the last one year.

The telecom and financial sector funds have growth potential and if this year's figures are any indication, they could fetch you decent returns over a three-year horizon. A word of caution though, investors should only put a small portion of their investments in sector funds, as they are riskier than diversified funds.

Issue opened on November 2
Issue closes on November 20