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TITLE: Energy Funds: Have they energized the returns on your Portfolio?

Energy resources or we can say that the power resources and power sector is a sector which is always centrally focused in the countrys economy. It will be glad to us to know that our country counts in the top 10 countries having large amount of production of power, it generates 176990MW of power per year approximately. Nowadays energy sector is governed by both private and public sector but before liberalization the scene is not so, only public sector that is only government has the right to take part in energy sector. The energy laws were amended and then only private sector can take part in this sector. Liberalization is provided in 1991 by Dr. Manmohan Singh. After liberalization come the one window system for foreign companies which provide them certain facilities and relaxation in taxes thus attracting them to take part in our countries economy. At present any foreign company can have the projects regarding generation of electricity, its distribution and transmission (excluding atomic reactor power plants) without any boundaries of cost of project or quantum from foreign direct investment etc. If we see the graph of Indian economy since 1991, after many ups and downs we will find that there is finally a large increment in the economy of India despite the presence of large scams and global crisis in the history. A return of around +12.0% on Compounded Average Growth Rate (CAGR) basis is delivered after 1991. BSE Power Index despite being operated from the year 2005 has given a return of +13.1% on Compounded Average Growth Rate basis. Let us do an example based on simple calculation to understand the fact more clearly, suppose we have a sum assured of Rs. 10000 invested in the BSE sensex then we get a return of sum of Rs. 96875 in the year of 2011 while if the same amount is invested in BSE sensex in the year of 2005 then we get the sum delivered of Rs. 22628 in the year 2011. As we know that one industry depends on another or they are mutually dependable. While the energy or power sector is growing on one hand making increase in countrys economy and wealth as well, mutual funds industry is also making its root on the other hand. Same is the story of mutual fund industries too, before liberalization it is governed by only public sector, entry of any private sector company is strictly prohibited but as liberalization takes place in 1991, private sector booms into it making our countrys economy more powerful. Now even mutual fund companies from foreign are attracting to our country and setting their offices in India too, and other industries are also getting benefit from this as this provide them their capital requirement. Now the main question arises is that while the companies from foreign are benefitting themselves from our countrys sources then why not its us who get the benefits too? Why the mutual fund industry of India itself is not focusing on the settlement of power and energy sector to the motion? They launch their funds regarding energy and power sector only before 2008 or the U. S. subprime mortgage crisis or when the Lehman Brothers got bankrupt. If we do a thoroughly study of all this then we will reveal that most of these mutual fund

industries were capitalizing on positive sentiments of the investor, in fact we will find that some of these companies were at high market rates whereas the P/E ratio of the BSE sensex is in between 22 to 29 level only, but the good fact is that we can find success of these companies in achieving more AUM in prolific time period of the Indian markets while the performance of the funds related to the energy or power sector is not going good though.

Figure 1

If we study the above table, then we will find that most of the mutual fund regarding power and energy sector delivered dull returns. They have delivered 4.1% CAGR return on an average basis, which is very low. Portfolio Trait and its strategy:

Energy or power sector is mainly concerned with power (electricity), oil and gas. Now, since these stocks changes abruptly, the performance of the energy funds also changes accordingly converting it to a high risk investment. According to the latest survey of July 2011, the largest percentage of the portfolio holdings goes to the oil and gas which has approximately 59.1% and others like power (electricity) contains 6.3%, engineering has 4.6%, finance has 4.2% with the least in textiles which has only 2.5% of the portfolio holdings, the name of the company that has highest percent of holdings is Petronet LNG Ltd. with large market cap and the second highest goes to the company with name Oil and Natural Gas Corporation Ltd. The main cause of the low performance of these funds related to power or energy sector is that the mutual fund industries they are invested in is afflict to the availability of fuel. While the discovery of KG Basin reduces the worries but the supply restrictions still remains the same. This makes companies of our country to meet their need of resources from outside the boundary of the country. Leaving this problem aside the other problems faced by a company are of placing the plant that requires big part of land and that means deforestation, also the pollution caused by the plant is a major thing to be concerned with. For passing a bill for requirement of land one may have to face political opposition also and hence may lead to corruption and other factors also. All the above mentioned points are the main reason and factors that affect the project and delays its execution which in turn is paid by the toll on the performance of stock prices of power sector which imminent the profits and returns. Conclusion The answer of our main question that is, does the energy funds have energized the returns on our portfolio, is no, they havent. They have not been succeeded in energizing the returns on portfolio. Although some companies invest beyond the energy sector but didnt get the prominent result. One of the main reasons of the failure is in the system problem. The one thing to be noticed is that the potential of the energy sector is very high and to get out best benefits out of that we have to park our capital more to such funds as they have a characteristic of blowing the opportunities across sectors thus raising their chances to have a better performance. Although, opportunities style diversified equity funds had excellent performance on energy funds and thus creating huge amount of profit as well. The main thing to remember while selecting an opportunity fund is that if your mainly concerned with your capital here than it will be best if we choose a fund that has a good past record and stay in the investment for short term investment of some years, also the fund we have opted for must be from a fund house that have good fundamentals and strong investment system.