Kotak K-Tech: Hold

Recommendation: Hold

Suresh Krishnamurthy

FRESH investments in Kotak K-Tech need not be contemplated for now.

The fund's performance last quarter was lacklustre compared to some of its peers. However, as it is too early to judge the performance, investors can stay invested.

As at end-October, the fund shed close to 38 per cent since launch. This compares favourably with most technology sector funds for the same period. However, it masks the fact that in the last quarter, the gains made in the April-June quarter were actually wiped out. The focus on mid-sized companies in the software service industry and the exposures in the media sector are largely responsible for this.

However, from a medium-term perspective, the focus on mid-sized companies appears reasonable considering that such firms are expected to outperform their larger counterparts.

Suitability: Investment in a sectoral fund is riskier than that in a diversified equity fund. As such, investors need to ensure that their overall exposure to technology stocks is within the limits dictated by their individual risk preferences. Also, they need to consider that the risks associated with this fund are a little higher, given the focus on mid-sized companies in the software services industry.

While this segment as a whole may outperform the larger companies, the risks faced by the companies are also higher -- more so in the case of the listed universe of mid-sized companies. Also, the exposure to the media sector, while providing the benefits of diversification, may not reduce the risk profile.

The fund only has a dividend payout or a dividend reinvestment facility. Investors can opt for the dividend payout facility and evaluate the reinvestment option at the time of declaration of dividend.

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Portfolio allocation: The fund started investing in March when the stock prices of technology companies were at a peak. The fund did, however, maintain close to around 20 per cent in cash throughout the period of falling prices. If this did not stem the fall in NAV, it is due to the stock selection policy. Specifically, the inclusion of volatile stocks, especially from the media sector, proved costly for the fund.

From end-September, the fund has remained fully invested. As at October 31, the fund had 71 per cent in IT companies. Other segments in which the fund is invested are media, finance, telecom and the healthcare sector.

Among software service companies, large software companies such as Infosys and HCL Technologies accounted for 35 per cent of the portfolio. Along with exposures in finance, telecom, healthcare sector and cash holdings, these exposures form around 56 per cent of the net assets. The remaining 44 per cent is accounted for by mid-sized software and media companies. The large exposure to these stocks represents an opportunity and, at the same time, defines the fund's high-risk nature.