Tech funds: Look closely

Suresh Krishnamurthy

THE recent run-up in the NAVs of technology stocks should come as a relief to most retail investors. Vast sums of money were sunk into these funds in early 2000.

In most cases, the depreciation in value was over 70 per cent since the launch of these funds. As such, the rise in values would have reduced their losses to an extent.

There are also a few more angles to the recent surge. One, investors have the uncanny habit of putting money into sectors that have seen a recent run-up in prices. This, more often than not, has been a prescription for incurring losses. In this backdrop, it would be imprudent to increase exposures to tech stocks now. On the contrary, investors with a high exposure to such stocks should pare them now.

Another aspect is the performance of the various technology sector funds. The variations in the various infotech funds over the last month were substantially influenced by their cash positions, and whether they chose to invest outside the sector.

Not surprisingly, funds such as Pioneer ITI Infotech and Alliance New Millennium, which remained invested in the sector and chose to hold a smaller percentage of net assets in cash, have done significantly better. Funds such as Prudential ICICI Technology, Sun F&C Technology, Pioneer ITI Internet Opportunities, and ILFS E-com, which invested in sectors other than software, come next in terms of performance.

Funds such as Chola Freedom Technology and Tata Select Sector, which had a substantial portion of net assets in cash, ended up at the bottom of the list. Interestingly, the run-up in stock prices has not penalised these funds for choosing to remain not invested.

This is because, in terms of year-on-year rise in values, the funds have still outperformed their peers. However, investors who went into these funds in the past three months would have lost significantly.

Overall, the rise in values offers investors an opportunity to switch to other diversified funds. This is especially so for investors who cannot actively manage their holdings in sector funds. In addition, this is also an opportunity to switch from badly performing sector funds to funds with a better record.