DSP Merrill Lynch Technology.com fund: Hold

Recommendation: Hold

Suresh Krishnamurthy

INVESTORS in DSP Merrill Lynch Technology.com fund can hold onto their exposures for some more time to see how the fund delivers over the longer period.

Fresh investments, however, need not be considered, given the fund's lacklustre performance in the last three months, when it underperformed most other technology sector funds.

Suitability: Technology sector investments are riskier than the market average. Another factor to be considered is the investment style of DSP Merrill Lynch, which focusses on market timing and a high degree of portfolio turnover. These issues tend to enhance the risk.

The fund is suitable for investors who do not have adequate exposure to mid-sized companies in the software services exports sector. The portfolio is built around such stocks. However, it may be better for investors to wait now and consider taking exposures after seeing the track record in terms of fund management in this particular scheme.

Investors can opt for the dividend option for now. After next years's Budget announcements on taxation of dividends distributed by equity schemes, a fresh evaluation can be made.

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Portfolio allocation: The portfolio of DSP Merrill Lynch Technology.com Fund is different from other sectoral funds. The weightage of the large companies, such as Wipro, Infosys, Satyam and HCL Technologies, at 31 per cent, is much lower than that in other funds.

The weightage of mid-sized companies, such as SSI, DSQ Software, Digital India, BFL Software, HCL Infosystems and VisualSoft Technologies, is, in contrast, fairly high. Exposure to smaller companies has also been kept to a minimum. The choice of stocks in the mid-sized segment appears to have been made with a view on comparative valuations and has avoided stocks such as Polaris Software and Silverline Technologies.

The fund also made investments in electronics, multimedia and telecom stocks. However, the weightage to all these sectors has been pegged quite low, at less than 7 per cent. The fund, which had a large cash component even till the end of July, had whittled it down to 12.5 per cent by August end.

Considering the valuations of the stocks of large companies and mid-sized companies, the portfolio allocation appears reasonable and does have the potential to deliver returns commensurate with the risks involved in the fund. However, an aspect to be kept in mind is that the portfolio allocation can change within a short period. And it has been seen in the other equity schemes of DSP Merrill Lynch that such changes have not worked to the advantage of investors.

Performance: The fund lost around 18 per cent in the last three months. Since its launch in mid-May, it has shed 12.1 per cent. The scheme fares poorly compared to other technology funds. This is mainly because of the outperformance of the stocks of large companies over mid-sized companies. This is, however, unlikely to continue if the Indian IT potential gets fulfilled.