MF Query Board
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Is it the right time to invest in PSU funds as they are performing well in the last few months?
- Neha Sharma
Listed public sector companies are now be turning to emerge as attractive investment opportunities after a decade of underperformance. Many analysts believe that as the environment turns reflationary and valuations remain at a discount, the fortunes of PSU stocks could change. PSU stocks underperformed during the previous decade due to ballooning debt and were hurt by the government’s pro-cyclical fiscal policy. Moving away from the deflationary trend could benefit the PSU stocks. It is aided by the rally in commodity price and demand recovery that is underway. This augurs well for PSU profitability and stock performance.
Historically, during commodity price rise, PSU stocks have delivered very strong returns, with their earnings tending to do better than that of Nifty. With the capex cycle peaking and improving cash flows, there is significant deleveraging potential for equity investors. Thus, PSUs present large operating and financial leverage potential to capitalise on the changing macro environment. PSU funds are part of thematic funds and currently there are three such funds. The following table gives you a glimpse of the PSU funds in India.
These are the only three funds that are available for investment which dedicatedly invest in PSUs companies. If we look at their portfolios, around 97 per cent of total assets are invested in equity and related instruments. If we dive deeper, around 65 per cent of the assets are contributed by the top 10 companies and majority of the holding is by energy-related companies. Indeed, it is a very concentrated portfolio. Concentrated portfolios carry higher risk than a diversified portfolio. So, if you have achieved all your financial goals, specifically those which are your needs, and if your risk profile permits you to take higher risks then you can consider investing in PSU funds for the time period of three years.
Is it fine to buy more mutual funds of the same kind? For example, if I want to invest Rs10,000 in a large-cap fund, should I go for four different large-cap funds or put it in a single fund?
- M Krishna Kumar
Well, you should look at it in the context of your overall investments and not just your exposure to large-cap funds. Let me explain with an example: If you want to invest `10,000 in a large-cap fund which accounts for just about 50 per cent of your overall investments, in such a case even a single large-cap fund would be good enough because there is money moving into other funds as well. Moreover, in case of a large-cap fund, investment into more than one fund will neither yield you better returns nor give you better diversification. Most of the large-cap funds more or less imitate the returns of the benchmark and there is not much difference in their portfolio. So, on an overall portfolio basis you would still be diversified even if you choose only a single large-cap fund.
But having said that, if you are investing in a small-cap fund and that accounts for a much bigger proportion of your overall investments or if these are the only investments that you are making, then perhaps you can add more than one fund. This is because small-cap stocks have a larger universe and investing in different funds can help you to better diversify your portfolio. Therefore, owning more than one fund from the same category will depend upon your overall portfolio and the proportion of the investment that is going into it. Depending upon the category, even a single fund can help you to achieve the required exposure to the category or you may require a couple of them. But never go beyond two funds from a single category.