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Mutual Funds oriented towards PSU

With the government aiming to raise around `40,000 crore in financial year 2011-12, one can expect more initial public offers and follow-on public offers from public sector units (PSUs).

Companies where stake dilution has already been approved include Power Finance Corporation, Steel Authority of India (SAIL), Hindustan Copper and Oil and Natural Gas Corporation. Others like Indian Oil Corporation, Metals and Minerals Trading Corporation (MMTC) and National Aluminium Corperation Limited (Nalco) are also expected to be made available to investors this year.

To cash in on this opportunity, mutual funds houses launched PSU schemes last year to attract retail investors looking to invest in government firms. Fund managers feel PSU funds are a good avenue for retail investors and are a must-have in one's portfolio. Reason: PSUs are fundamentally strong companies and, with the government's backing, chances of defaults are less. Also, most of them have a monopoly in the industry they operate in. During the economic slowdown, they showed greater resilience than their private sector counterparts.

With a new set of government firms likely to go public this year, there will be a lot of portfolio churning in PSU funds to include more such stocks, fund managers say.

The PSU index has outperformed the Sensex by 8-10 per cent over the last 10 years. Since May 13, 2002, it has returned almost 445 per cent, as against 438 per cent from the Sensex. Also, given the scale, size and valuation of these companies, holding them can be a good bet from a risk-reward perspective. However, returns from these funds are not very attractive.

Presently, there are only four mutual fund schemes investing in PSUs, apart from two public sector bank funds. The former include Baroda Pioneer PSU Equity, Religare PSU Equity, SBI PSU and Sundaram PSU Opportunities.

According to mutual fund tracking agency, Value Research, while Sundaram PSU Opportunities has returned 10 per cent over the last year, Religare PSU Equity has returned 3.5 per cent. In comparison, the Sensex returned over seven per cent in the same period.

Others like Baroda Pioneer PSU Equity and SBI PSU have returned negative nine per cent over the last six months, almost in-line with the Sensex (negative eight per cent).

Radhika Gupta of Forefront Capital Advisors believes these aren't a bad investment option. There are good PSU banks like State Bank of India (SBI) and companies like ONGC one can consider investing in. At the same time, since most investors hold largecap schemes, she warns them not to go overboard with the theme. So, if you are already invested in largecap funds, you could stay away from PSU funds.

For instance, HDFC Top 200 holds PSU heavyweights SBI, Punjab National Bank, Gas Authority of India (GAIL), National Thermal Power Corporation (NTPC), ONGC and Oil India. Similarly, Fidelity Equity invests in SBI, Bank of Baroda, ONGC, Larsen and Toubro (L&T), NTPC and Bharat Heavy Electricals Ltd (BHEL). Both these funds are returning 13 and 11 per cent, respectively, higher than PSU funds.

It is a risky affair as these are thematic funds and you would end up putting all the eggs in one basket. One should not invest more than 5-10 per cent in these funds.

Financial planners suggest investing 80-85 per cent of your portfolio in good, largecap funds and experimenting with sector or thematic funds with the remaining. This would vary according to your age and risk taking ability.

Experts also feel these funds may not be meant for small investors (those investing up to 10,000 through systematic investment plans). Instead, they could help the bigger investors diversify their portfolio further.

In case you are planning to buy PSU stocks, that wouldn't be agood idea too, as far as the returns are concerned. The PSU index has given negative two per cent returns over the last year and negative 11 per cent over six months. Though there are many interesting stocks in this space, it is by virtue of their fundamentals and not because they are government firms. For instance, NTPC has been underperforming over the last three years.

Therefore, it's best to stick to a good large and large & midcap fund. That should suffice.

Ø       PSU index has outperformed Sensex by 8-10 % in the last 10 years

Ø       These could be safer investment avenues

Ø       But, these funds are thematic; invest up to 10 per cent

Ø       Invest in PSU funds only if not holding a largecap fund

Investing both in largecap and PSU funds could lead to overexposure

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