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Marginal redemption in Tech funds

Investors are finally getting impatient with their technology investments. Despite sharp drop in NAVs, tech funds have come under redemption pressure in March

There are evident signs of trouble for the beleaguered family of technology funds, which have came under redemption pressure last month. While outflows were not sizeable, it is surely an ominous indicator of the shape of things to come. That redemption occurred in March, when technology funds hit their nadir, reveals that investor patience is running out and they are undeterred by the abysmal NAVs. Clearly, unitholders see no prospect of a revival from current levels and thus, have exited at a steep loss of 60-70%. At the same time, these could also include some investors, who entered at sub-par NAVs and therefore, their losses would be lower.

"It is the other extreme where investors' craze for anything tech has now simply turned into utter disenchantment and hence, they are pulling out. When you are in a hopeless situation and in fact see your money losing more, you redeem to cut further losses. This is what happened in March,'' says the Delhi-head of a mutual fund. Sure, these investors today stand vindicated with technology funds losing more from their March-end levels. For instance, IL&FS eCOM has slipped further from Rs 3.06 to Rs 2.88 while K-Tech is down to Rs 3.35 from Rs 3.47.

The worst hit due to redemption is Sun F&C Emerging Technology. The fund had garnered an initial unit capital of Rs 257 crore (25.7 crore units at Rs 10) in its IPO but the mopup has now started to wilt under repurchase pressure. Since January 2001, the unit capital has gone down from Rs 194 crore to Rs 170.65 crore on March 31, with most of the outflows in March. It's a grimmer picture since launch with the fund losing over one-third of its initial capital base. Worse, it's a double whammy for the fund. Redemption coupled with drop in NAV has led to a shrinkage in size - since January 2001, Sun F&C Emerging Technology has lost 45%, dropping from Rs 116 crore to under Rs 65 crore.

It's the same sob story for other funds as well, including the two biggest tech schemes - Alliance New Millennium (ANM) and Prudential-ICICI Technology. While the duo have seen outflows this year, they are still better off from their IPO mop-up levels since they received steady inflows for most part of 2000 with a dropping NAV. For instance, ANM had collected a whopping Rs 540 crore at the peak of the ICE rally last year. While the current unit capital is higher at Rs 596 crore, its still lower from January figure of Rs 617.54 crore. The only contrarian in the pack is DSPML Tech.Com, which has seen net fresh inflows in the current calendar.

"It's a wake up call for asset management companies. If investors are willing to exit despite sharp losses, it means redemption pressure could be more severe once markets see a turnaround and NAVs start to move up," says the CIO of a mutual fund. It may be recalled that technology funds were a rage in early 2000 as investors poured tonnes of money, hoping to see their investments double overnight! However, with the dream turning into a nightmare, the more disgruntled souls are now walking away with whatever little is left.

However, the moot question is - is this time to redeem? Agreed, software funds are deep in the red but then, they were launched just a year ago. If you had invested in the sector with an aim of redeeming at a hefty gain within a short span and without knowing the pitfalls, you do not deserve any sympathy. Equities and especially technology is a highly volatile investment and demands a long-term commitment. While the sector is going through a bad patch across the globe, it still continues to be a strong long-term performer. For, there is no denying the fact that the sector will continue to play a pivotal role in our day-to-day lives. Thus, the current slump provides an excellent opportunity to accumulate units at lower levels and average out your cost of investment. So, stay invested and invest for the long haul!

Investor Fury!
    Current NAV  Unit Capital (Rs Crore)**    
   (in Rs) January February March
  Alliance New Millennium 4.58 617.5 610.8 596.0
  DSP-Tech 3.8 47.1 46.8 47.7
  IL&FS e-COM 2.88 191.5 189.2 182.8
  KP Internet Opportunities 4.88 519.0 510.6 502.6
  K-Tech 3.35 211.7 209.4 206.0
  Pru-Tech 3.19 565.3 562.5 542.3
  Sun F&C Emerging Tech 3.65 194.1 187.1 170.6
*Size is a function of NAV
**Unit Capital is a function of Par Value (Rs 10 in this case)