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Funds that invest in small/mid-cap stocks may be a better option than sector-specific funds, because they are more flexible in responding to opportunities.

I wish to invest in equity funds that offer high returns, I don't mind taking a higher risk. I am wondering if I should invest in IT sector funds. Is it advisable to buy them now? Among IT funds, which is the best fund?

Yogesh Kulkarni

If you have a high-risk appetite and are keen on earning a higher return, do consider diversified equity funds with a strong mid- or small-cap focus. Exposure to funds such as the HDFC Long Term Advantage Fund, PruICICI Tax Plan and Sundaram Mid-cap Fund may help you earn the high return that you seek over a 3-5 year time-frame.

These funds would carry a higher risk than one that invests in large-cap stocks, given that returns from small- and mid-cap stocks tend to be more volatile than those from large-cap stocks. The funds we have mentioned here have a reasonable track record of delivering high returns through various market phases.

These funds, which invest in small/mid-cap stocks from a range of sectors, may be a better option than sector-specific funds, because they have the flexibility of tapping into the various opportunities thrown up by the market.

As these funds manage a diversified portfolio, you can depend on the fund manager to spot sectoral and theme-based opportunities and capitalise on them. You may not have to consciously time your investments and can follow a buy-and-hold strategy with such funds.

In contrast, when you invest in a sector-specific fund, you need to have a reasonable sense of timing when you enter and exit from the fund. Most sectors are subject to business cycles.

You stand a chance of earning a high return from a sector-specific fund, if you enter the cycle at the beginning of a buoyant phase and exit when a downturn seems imminent. This calls for close tracking and fairly keen sense of timing on your part. Retail investors may find it quite difficult to fine-tune their entry and exit strategy to this extent.

But if you have any special reason to believe that technology stocks will outperform the rest of the market over the next two to three years, you can consider IT sector funds.

Please allocate only a portion of your portfolio say, 10-15 per cent to sector-specific funds. Despite the recent meltdown in some IT stocks after their March quarter numbers, we believe that the growth prospects for the frontline IT companies has not materially altered.

However, given the wide divergence in performance between the different IT companies, only select stocks may deliver attractive returns.

Of the various technology funds on offer, you could consider DSP Technology.com Fund, PruICICI Technology Fund and Franklin Infotech Fund, as their portfolios focus mainly on software and telecom companies and also have a good three-year record.

The Tata Life Sciences and Technology Fund, despite its good returns over the past three years, invests in a significant number of stocks from outside the software sector and may not fit your bill as an IT-focussed fund.

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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