Synopsis

Its performance in the last five years makes Reliance Diversified Power Sector Fund one of the top picks. However, it is important to take note of the funds high beta and the risks associated with a sectoral fund.

Power, undoubtedly, is one of the most attractive sectors of the economy today. It is, thus, obvious to see portfolios of most of the diversified equity schemes to have bias towards the power and related stocks. So, it does make sense to review schemes that are dedicated solely to this sector.

Reliance Diversified Power Sector Fund, the second-largest diversified equity scheme of the country, in terms of assets under management (AUM), is undoubtedly one of the biggest beneficiaries of the bullish trend seen in the power sector in the last few years. With AUM of over Rs 5,700 crore, the fund is only next to Reliance Growth in terms of size. But as far as the performance is concerned, it is way ahead of not only its peers, but also of those from its own fund house.

PERFORMANCE

Reliance Diversified Power Sector���s performance, since the time of its launch in May ���04, has already won it many accolades. Moreover, its ability to beat the market indices in the bull-run, as well as, in the downturn has given this fund an edge over many others in the sectoral theme based funds. The fund currently boosts of a very high alpha indicating its ability to beat its benchmark index by good margins.

It has handsomely rewarded its investors in the past with absolute returns of 81.4% in 2005, 58.8% in 2006 and a whopping 124.4% in 2007. While the fund did slip in performance in 2008 with returns of -50.4%, it nevertheless did manage to outperform the market returns that were down to -52% in that year. The year 2009 has once again ushered the growth story and this fund too has been gearing back to its basics with a return of over 81% since January this year.

The corresponding returns by the Sensex and the BSE Power index has been 73% and 65% respectively during this period. The fund has thus once again managed to outperform the market returns so far.

PORTFOLIO

Given its dedicated Power sector theme, the fund naturally is dominated by the power sector stocks. But at the same time, it also has good exposure to sectors like engineering, metals, financial services, construction and communication. The number of stocks, however, has been restricted to less than 30, marking down the fund���s diversification.

With stocks like Torrent Power, Tata Power, Jindal Steel & Power and Jai Prakash Associates, that have seen a good run-up in the last few months, this high beta fund has made the best of the opportunities that have been thrown open in the market upturn this year.

However, one aspect, on which the fund has been often criticised is its practice of sitting on relatively high piles of cash. Barring the last three months, the fund has been religiously following a policy of maintaining over 20% cash in its portfolio. These levels were infact enhanced to over 40% during the market meltdown, which in the hindsight suggests that it capped the fund���s downfall.

This, however, also implies that the fund could have conveniently missed out on opportunites thrown open post Mar ���09. It is thus little surprise to see the fund reducing its cash pile and currently has just about 17.7% of its portfolio in cash, lowest since April ���07.

OURVIEW

Rewards marry risk, and if one is willing to play the game of probabilities, Reliance Diversified Power Sector may just be the right answer.

The fund has been a star performer in its last five years history and even today it is aggressively playing along the market tides. Undoubtedly, this fund is one of the finest products from the Reliance basket.

However investors must take a note of the fact that the past performance is not indicative of the future performance and that the fund���s high beta and risks associated with sectoral funds must be taken into account before venturing into such theme based funds.

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