I invested Rs 50,000 in one of the technology fund's IPO over 30 months ago. Since the past two years, the NAV of the fund has been below par. Apart from getting no returns, I have suffered around 60 per cent capital erosion. What do you think I should do? Should I hold it for some more time or exit the fund?
J.S. Chander Kant, via e-mail
Chasing high returns was an exercise, which like you was undertaken by many of us in 1999-00. And after burning our hands, now the mistake seems apparent. But in those times the gains were huge and not investing exclusively in the technology sector seemed difficult to comprehend. Technology was meant to be the future. Great things were expected from information technology companies and the stocks of these companies seemed to be on an never ending upward march. But when everything is going right something must go wrong.
The inevitable happened and the bull market gave way to an equally strong bear market. Technology stocks, and with them technology funds, came crashing down. But other than learning lessons, you probably should not dwell on it too much. So rather than focusing on what has been lost, now is the time to establish a better strategy for the future.
Now before you jettison this investment, you need to understand its nature. Sector funds seek to generate returns by investing in a particular sector. This is a high-risk high-return strategy as the fund has no option but to invest in these stocks irrespective of market conditions. These schemes cannot reduce risk by diversifying into other sectors. All your eggs are actually in one basket over here.
As nine of the 12 technology funds were launched when the market was around the peak and technology stocks across the board have largely collapsed, investments in these have crumbled resulting in more than 50 per cent losses. Because the levels touched by technology stocks then are not expected to come back in near future, if ever, the losses suffered are real and not notional.In view of this, it is important to realize that sector funds are like the chillies and pickles, which we have with our food. They make our meals more tasty and enjoyable.
Taken in excess, they can lead to severe indigestion. Similarly, technology and other sector funds can give a boost to a portfolio. Nonetheless they are extremely volatile and should only make up a small portion of an equity portfolio—anywhere from five to 25 per cent—depending on the risk tolerance. It is also important that one has a good understanding of the sector. In view of this, venture only if you are well informed and willing to take higher risks.
The best way to invest in sector funds and for that matter in any fund is to have a plan, because without a financial plan it would be more of speculation than investment. A financial plan would help you clearly define the objective, time frame and the risk profile.
So reassess your financial goals. If you require your investments or feel that your portfolio is excessively skewed towards sector funds an exit may be advisable. Moving money out in chunks, rather than all at one go so that a one time hit is not taken, is a possible option.