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Alliance Sector Funds

Alliance Capital has launched three broadly defined sector funds - Alliance Basic Industries Fund, Alliance Buy India Fund and Alliance Millennium Fund.

The schemes
Alliance Buy India Fund will mainly invest in consumer and healthcare stocks. Consumer stocks will include personal care, food, beverages, tobacco, media and retail while healthcare will include pharmaceuticals, over-the-counter (OTC) medicine, ayurveda products, hospitals, drug intermediaries, fine chemicals and agro-chemicals.

Alliance Millennium Fund will invest in the technology stocks including software service and products, hardware, e-commerce, Internet, telecommunications and media.

Alliance Basic Industries Fund will invest in economy related cyclical stocks. This fund has a broad investment horizon and includes automobiles, cement, construction, metals, capital goods, petrochemicals, steel, paper etc.

The three funds are available at Rs 10 and are open for initial subscription from December 15, 1999 to January 15, 2000. The funds will be charged an initial expense of 2 per cent implying a starting net asset value (NAV) of Rs 9.80 for your investment of Rs 10. The minimum initial investment amount is Rs 5000 and the minimum subsequent investment is Rs 1000. The schemes also provide systematic investment plan and systematic withdrawal plan. Besides investors can switch from these funds to any other fund of Alliance Capital without any load. All the three funds offer growth and dividend plan besides the benefit of capital gain investments under section 54EA and 54EB of the Income Tax Act. Under the dividend plan, it will pay annual dividend in March every year.

Solid track record
Alliance Capital came into the domestic Indian fund business in January 1995, with the launch of Alliance '95, a balanced fund. Today Alliance Capital India is an open-end family with six domestic funds - two diversified equity funds, one balanced fund and three debt funds. Alliance Capital has built a solid performance track record with its equity and balanced funds. All the three funds are top performing funds in their respective categories.

Investment case
The launch of three exotic funds from a winner asset management company is gaining disproportionate attention. Investors need to answer two questions specifically. Will new funds bring superior returns or is it better to invest in existing funds? How good are specialised or sector funds?

With my conventional investment wisdom, I have always warned investors to steer clear of new mutual funds and to stay with funds that have established track record of three years or even longer. But an investor who followed that advice today would be forced to ignore 66 of the 101 open-end fund that have been established during the past three years -- including 31 that are less than one year old.

At the very least, their performance in recent years merits further study. I took a closer look at the numbers to make a more-informed investment decision. The key finding is that new equity funds have higher returns than their older peers in recent period. This higher return, however, has been driven by greater risk-taking on the part of new funds. In general, on a risk-adjusted return basis, these funds have not outperformed their older peers. Importantly, evaluating funds based on longer periods of performance is still a good idea.

On the attractiveness of a sector fund, these funds with their sharp focus should deliver superior returns. The sector outlook of these funds is quite bright over the medium-to long-term. However, these funds lose out on the benefits of diversification. A sector fund contains stocks that react in a similar fashion, either up or down, to factors affecting the industry. Such a fund will have to stick to the stocks of the specific industry irrespective of pessimistic or optimistic forecasts for the sector and build the portfolio that gives the best risk-return payoff within the constraints of sector investing.

The sector funds on offer are ideally suited for investors seeking growth in a time horizon of three to five years through investment in shares of well managed with bright prospects. However, investors should look at these funds as an add-on to enhance their overall return to an already diversified portfolio. These funds are not complete investment solutions.

A smart investor in a new fund should do some homework first. In other words, don't buy a new fund just because it's new. Consider a new fund if you like a particular sector, then the fund manager with an established track record, or if a new fund is managed with a style that matches your objectives and fits within your existing portfolio.

MUTUAL FUNDS

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