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Surviving Fund Indiscipline

If you are disappointed with technology funds but still holding in hope of a recovery, these funds may not be helpful. You will do well to pull of the indisciplined technology funds fast.

Equity fund managers have a simple mandate. To make money for their clients i.e. investor's. But all that changed with investment philosophy statement of funds and many exotic offerings. Still, most equity funds are at liberty to make money anyhow given their vague mandate, which allows them to buy any stock of any size or kind. A defined investment policy and philosophy of a fund helps, as it guides investment decisions and also help an investor set realistic expectation and likely behaviour of the fund. Such guidelines would have saved Indian investors from some of the big disappointments - the Unit '64 crisis, the assured return crisis of public sector bank funds, the MIPs, the last year debacle of diversified equity funds which went overboard technology last year and now on the other extreme of caution -- technology funds to take shelter with a big cash position.

I discovered that the technology funds, the badly beaten in the past 18 months and bleeding again after September 11, seems to have given it up on their mandate. Their portfolio showed that these funds were heavily in cash in their bid to survive the freely falling market. For instance, Chola Freedom Technology has increased its cash component from 37% in early 2001 to the current level of 64%. Similar for Birla IT, where cash holding has zoomed from 29% to over 55% in nine months.

But this strategy can be dangerous. I choose to invest in a technology fund, to own a diversified portfolio of tech stocks, not to be in cash. If my tech fund is in cash, I will not invest in one in the first place, or should redeem my investment. And being in cash may backfire, just in case technology funds make a comeback. Don't laugh at me, as it is not unusual for investment to turnaround, when we least expect it.

And unlike other sectors, which steadily pick up momentum, the technology bulwark simply shoots northwards with gains flowing at a lightning pace. This week itself, BSE IT Index jumped over 13% while technology funds are up an average 6.1%. Thus, it is not surprising that funds sitting on a pile of cash have been caught on the wrong foot. While Chola Freedom Technology has moved up only 2.64%, Birla IT has also been a below category performer with a gain of 3.57%. Magnum IT, another fund with 40% in cash, has been the worst with just 2.6% gain. On the other hand, some of their aggressive peers have logged in bountiful returns on the back of nearly fully invested portfolios. UTI Software is up 13.58% for the week while IL&FS e-COM has advanced by 7.2%.

If you are disappointed with technology funds but still holding in hope of a recovery, these funds will not be helpful. You will do well to pull of the indisciplined technology funds fast.

For the week ended October 12, 2001, the markets gained 147 points (5.20%) on the BSE Sensex while it moved up by 57 points (4.38%) on the BSE National Index. The top gainers for the week were - UTI Software (13.58%), ING Growth Portfolio (10.49%) and Alliance New Millennium (7.66%). The top losers for the week were - Magnum Multiplier Plus (-3.95%), UTI Petro (-0.87%) and Magnum Equity (-0.44%).