Launched in May 10, 2004, Reliance Diversified Power Sector Fund aims to exploit growth opportunities available in power sector in the country, driven by rising demand and scarcity of electricity in the country. India is facing electricity deficit of 9.3% and peak demand deficit of 13.9%. Also the government has launched an initiative to remove electricity deficit by 2012. This surely provides upside for the companies engaged in power business.

Reliance Diversified Power is open ended fund; the primary investment objective of the scheme is to seek to generate continuous returns by actively investing in equity and equity-related or fixed-income securities of power and other associated companies.

Pioneer and only fund in this category, Reliance Diversified Power has proven track record in terms of returns over the long term horizon, way ahead of benchmark India Power Index. The fund has posted annualized returns of 56.42%, 63.28% and 58.72% over the last one, three and since its launched respectively in comparison with the benchmark index which has given returns of 43.43%, 49.43% and 32.99% as of May 31, 2007.

Since past performance is no guarantee; also not determining factors for future returns, the obvious thing is to check the drivers and prospects for the sector as a whole. When queried by myiris about sector prospects, Sunil Singhania, senior fund manager, said, "India is amongst the two fastest growing economies in the world. Without proper infrastructure development of which power is a very key element, no country can be expected to sustain a high growth trajectory. Without power, factories can't run agriculture pumps and even computers in banks and BPO outfits will shut down. Thus for all sectors, power is very important. If you take some statistics, China adds up nearly 40,000 MW of new power plants every year. India has added less than 25,000 MW in the last 5 years. Thus it is very imperative that the sector be poised for a huge growth going forward. The resolve from the government is also very visible and every segment of the power sector, whether it be generation, distribution, equipment manufacturer, finance providers, etc. will benefit from the huge growth."

The fund adopt blend of growth and value oriented buying strategy with a prime focus on mid-caps; it also invests in large and small-caps companies. While commenting on the fund's investment philosophy and stock picking approach, Singhania said, "The investment philosophy of the fund is to invest in companies that will benefit from the high growth expected in the power sector over a long period of time. Stocks are picked with an investment horizon of 2-3 years."

The fund is dynamic in nature, meaning that it has the flexibility to be 0-100% in equity or 0-100% in debt. Thus the fund does not hesitate to increase its cash exposure and reduce its equity exposure when valuations tend to get a little stretched, Singhania added.

Some of the fund's favourite stocks over the last year include Torrent Power, Jindal Steel & Power, ABB, Reliance Energy, Siemens, Jaiprakash Associates, Crompton Greaves, Cummins India, and Voltamp Transformers.

The fund manager takes long term view before investing in stocks, so it is not that aggressive in churning portfolio. When asked about investment time frame for this fund, Singhania said that any equity investment from these levels has to have a time frame of a minimum of 2-3 years. Therefore, one should prepare to stay invested for a period of 2-3 years.

The number of stocks held in the portfolio is fairly static at 18, which is an increase of only one stock over a year. The top 5 stocks account for about 37.50 per cent of the total portfolio, while the top 10 stocks account for about 63.37 per cent. However, the fund has slowly increased debt exposure given the rising interest rate scenario in the country. Presently the debt component constitutes 21.25% of the total portfolio size. The asset under management (AUM) of the fund has climbed 86.52% to Rs 1,032.23 crore in the last one year.

The growth opportunities and the macro factors continue to remain attractive in power sector in future. When queried about opportunities investors should expect, Singhania said, "Power sector represents the growth in the Indian economy. With the deficient situation we are in, the power as a sector has the potential to grow faster than the general economy. We feel that power stocks will mirror this fast growth."