Magnum IT Fund: Hold

Recommendation: Hold

S. Vaidya Nathan

INVESTORS in SBI Mutual Fund's Magnum IT Fund can stay with the fund. But fresh exposures can be avoided till there is firm evidence that the fund will consistently stick to top-line stocks.

That the performance of the Magnum IT Fund has been fairly good is not surprising given the improvement in the valuation of the technology stocks during the 18 months the scheme has functioned.

The fund turned in holding period returns of around 55 per cent, while during the same period, the BL Technology Index gained around the same level. The performance was driven by a combination of active trading in its earlier avatar and a subsequent shift to frontline information technology stocks.

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Suitability: Only investors with a penchant for a higher level of risk ought to stay invested. Sectoral funds, especially those focussed on the technology sector, carry higher risk. But Magnum IT Fund, on account of its portfolio strategy, has a risk level that is higher than that of such of its peers as Kothari Pioneer Infotech Fund and the Alliance New Millennium Fund.

The portfolio, though more weighted in frontline stocks now, still has a riskiness about it. Though the fund has so far offered the returns to back the risk levels, going forward, some of its exposures could prove to be sticky.

Top holdings: The top five holdings of the fund are Infosys Technologies, Wipro, HCL Technologies, Satyam Computers and Moser Baer. These five stocks account for close to 60 per cent. Here too, a couple of the exposures, such as Satyam Computers and Moser Baer, are of a higher risk category.

Portfolio overview: The Magnum IT Fund today wears a better look as far as its portfolio is concerned. It is more weighted in frontline technology stocks, and appears to have churned its portfolio less than in the initial months. The performance could have been better if it had had a consistently higher weightage to frontline stocks.

Also, stocks such as DSQ Software, Aftek Infosys and SIP Technologies are high-risk and whether they offer commensurate returns remains to be seen. A factor to watch out for would be whether the fund stays with its frontline stocks. Though stocks such as Wipro, Infosys and HCL Technologies may not offer high returns in the next couple of years, from a long-term standpoint, they are the better stocks to back. These stocks could also provide a good anchor to the portfolio.

Fund view: On the technology sector, the fund has said: ``Indian companies have factors such as an offshore model, high repeat business and a large pool to hire from which gives them sustainable competitive advantages. We believe that Indian IT companies have superior business models and should enjoy higher valuation. We are confident the sector will out-perform in the medium term.''

Fund facts: The fund was launched as part of the Magnum Sector Funds Umbrella in August 1999. The minimum investment amount is Rs 2,000. There is an entry load of 1.75 per cent and no exit load. The fund offers a switch to other sectoral funds under the umbrella without any entry load. The fund manager is Mr Sachin Sawrikar, and the registrar Computronics Financial Services, 1 Mittal Chambers, Nariman Point, Mumbai 400 021.