Should you try to ‘manage’ your fund?

Every time the government announces a ‘reform’ or provides a booster to some ‘sector’, we have quite a few of you asking us about funds that will let you participate in the potential arising from such an announcement. It is, no doubt, heartening to note that you track broad economic events and would like to see your portfolio benefit from it.

If your question is about how to participate in a broad theme such as infrastructure or banking the answer is simple but if you ask for a fund to play micro themes – the ‘defence’ theme or ‘renewable energy theme’ or ‘railway fund’ or you ask us for funds with high weights to certain sectors; for instance: “I want a fund with high weight to defence but most funds have high weight to banks” and so on; here are a few points that you may want to know:

No funds for every theme
There are theme funds and sector funds but not one for every theme or sector. For instance, a fund with chemicals and fertilizers or say ports as a theme would not be available for the simple reason – there are not that many stocks in the listed space to run such a fund. Besides, these themes do not receive much weight (because they are few in numbers) in key indices. Hence a fund may not be able to exclusively run a fund for themes that have less presence in the listed space.

However, what many theme funds do offer is provide a flavour of such micro themes within a broader theme. For instance, ports may be part of an infrastructure fund, defence as part of a capital goods and engineering theme and chemicals and fertilizers as part of a consumer theme. Hence, you may need to settle for the micro themes you ask for, by choosing a broader theme fund.

What diversified funds offer
Even then, you may not always find ‘theme’ funds that fulfil your requirement. You therefore look for diversified funds that may also hold the themes you wish to take exposure to. This is where it gets tricky; for you start looking for a fund that will have highest weight for the theme you are looking for. This may not always happen.

A diversified fund cannot completely ignore key sectors (banking, energy, IT, pharma and so on) that receive maximum weights in the index and instead choose smaller sectors. They may go a bit underweight (that is taking slightly lower exposure to the sector than the index) or overweight on the sector. Ignoring it may prove to be costly if the index moves.

Even if you do manage to spot a fund with the exposure you seek, remember, the portfolio is subject to change. The fund manager may dynamically manage the portfolio and may rejig it after you invested in the fund. Hence, to expect a diversified equity fund to provide you with certain thematic exposure is not a practical proposition.

So what do you do when you wish to invest in your chosen themes – when there are no such theme funds?
– To be frank, if you want a micro theme, it is best you own a couple of good stocks in that theme, if you know how to pick one, track it and exit it.
– But if you are a regular mutual fund investor, just remember, the fund manager, very likely, is tracking the reforms/changes in the macro environment and their impact on stocks/sectors more than we do.
Hence, he/she would be tweaking the portfolio to tap into such potential. If this be the case, there may be little point in further trying to manage an expert-managed portfolio!
Besides, if the idea of investing in mutual funds is to manage less, then little point in sweating it out.
Unless of course, you had a ‘ask the investor’ meet by fund managers to seek inputs 🙂