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Battered Tech Funds under Redemption Pressure

The current calendar year has been dreadful for tech fund investors with a string of humiliating declines. They are no more willing to bite the bait of "elusive" hefty returns

Investment advisors may swear by bottom fishing in this market but what happens if investors simply want to jettison their fishing rod and run for cover? Well, despite the much-flaunted "bright" prospects for the technology sector, tech fund investors have not shied away from redeeming at sharply depleted net asset values. Thus, in the current calendar year, combined unit capital (units at Rs 10) for nine technology funds has dipped by Rs 256 crore (25.6 crore units) as last year's haloed funds have proved to be mere shooting stars.

The actual outflow, though, would be lower since all technology funds have plunged below par in the current year. For instance, K-Tech from Kotak Mahindra has seen its unit capital dip by Rs 18.32 crore since December 2000. In other words, the fund has repurchased 1.832 crore units in the last nine months. However, the redeemed amount would have been only around Rs 7 crore, given the fund's average NAV of Rs 3.75 in 2001.

While the absolute redemption figures may not be alarming, selling in a falling market only turns notional losses into real ones and catalyses the dip in NAV. Further; funds are forced to offload their top quality, liquid stocks in order to garner the redemption amount at a short notice. In a market where even bluechip technology stocks have been mercilessly hammered, second rung stocks can hardly extract the best price. On the other hand, if the fund dispenses cash to meet outflows, it misses out on opportunity to buy stocks at lower levels.

Yet, much of the shrinkage in asset base is attributed to the sharp fall in technology valuations rather than redemption. The BSE IT index is down 64 per cent in 2001 and declined more than 5 per cent on 23 occasions while the average technology fund has dipped by 57 per cent. In fact, the last quarter has been awful with funds slipping by over 30 per cent. Thus, the sizeable investment platter has wilted from Rs 1500 crore in December 2000 to Rs 612 crore last month.

Learning it the Hard Way
You invested in greed and you now redeem in fear. In a nutshell, that has been the saga of the technology investor since 2000. The lesson – technology is not for the myopic or the faint hearted. Here, both breakthroughs and gala returns turn obsolete at a lightning pace - the accompanying volatility is also too hot to handle. Thus, long-term commitment is the key to success. And long-term is not three months from now. It means 8, 10 or 15 years.

Little Promise
The current calendar year has been dreadful for technology fund investors with a string of humiliating declines. Thus, they are no more willing to bite the bait as they come to terms with sharp losses. Mutual funds are also fighting shy of assuring a turnaround at such abysmal levels. While an overwhelming majority sees tech funds as a dead investment and has not bothered to redeem, some investors have pulled out to cut further losses. Well, they have been proved right in hindsight since tech investments have only gone down – funds, which were hovering above Rs 5 in January 2001, are now below Rs 2. Worse, they now need a 400% gain from here to at least touch par levels! Despite peanut valuations, even the most diehard technology bull may not be willing to bet on such a soaring rally.

Clearly, investors are showing disdain for the hottest sector of 1999-2000 - there are no evident signs of the much propagated "buying at declines" to average out costs. With piercing losses, the defensive sector with galloping growth is in shambles. As for most investors, technology is now the sector of an "elusive" future. And, so are big-ticket profits!

Running for Cover!
  Fund  Unit Capital (Rs Cr)    Corpus (Rs Cr)    Net Asset Value (Rs)    Year-to-Date
   31/12/2000 30/09/2001 31/12/2000 30/09/2001 31/12/2000 30/09/2001 Loss (%)
  Alliance New Millenium 623.48 578.60 435.19 144.65 6.98 2.5 -64.18
  Birla IT 49.37 38.50 63.24 30 12.81 6.07 -52.62
  Chola Freedom Technology 42.05 36.95 50.00 27.3 11.89 7.14 -39.95
  DSPML Technology.com 47.41 45.66 29.96 12.42 6.32 2.72 -56.96
  IL&FS eCOM* 191.47 179.48 101.10 34.64 4.75 1.93 -59.37
  K Tech 213.30 194.98 119.66 39.19 5.61 2.01 -64.22
  Pioneer ITI Internet Opportunities Fund 523.11 486.95 328.51 168.97 6.28 3.47 -44.75
  Prudential ICICI Technology 569.64 526.04 271.72 111.52 4.77 2.12 -55.56
  Sun F&C Emerging Technologies 199.62 160.99 110.79 43.79 5.55 2.72 -50.99
*Corpus and unit capital for January 2001