The Hindu Business Line : Fund Talk

Prospects for the IT sector also seem to be looking up. Is the recent revival in technology funds illusory? What should investors do with their technology fund holdings?

Autar Deshi

IT spending in the US has picked up, the outsourcing backlash seems to have been contained and the pressures on pricing, from lower billing rates and an appreciating rupee have also abated to an extent. These factors are positive for earnings of IT companies. As a result, the CNX IT index has been the best performing stock market index over the past year and sector funds dedicated to technology stocks have outperformed several diversified equity funds on one-year returns.

But as an investor in technology funds, it may still be advisable to re-balance your portfolio, so that you do not expose a very large proportion of your investment to the risks of one particular sector.

Sector funds call for an ability to predict the swings in business cycles for a sector. These skills, in him or in his advisor, are necessary since an investor may have to time his entry and exit from such a fund carefully. This may be difficult for common investors. So while sector funds can make up one part of your portfolio, your core portfolio should still be invested in diversified equity funds with a good five-year track record.

Though these may underperform sector funds over short periods of time, diversified equity funds are likely to deliver superior and more consistent returns over a long holding period. What proportion of an investor's money should be parked in sector funds, will depend on individual risk preferences, which could vary widely between investors.

A conservative investor should perhaps, have no more than 10 per cent of his investments in a sector fund. Investors who have stayed invested in technology funds for years now must think of reducing their exposures over the next few months if investment in such funds are a large proportion of their holdings.

(Queries may be e-mailed to mf@thehindu.co.in, or sent by post to Business Line, 859/860 Anna Salai, Chennai 600002.)

Aarati Krishnan

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