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Mighty Challenges

This small-cap dominated sector fund is capable of delivering exceptional returns but will surely test your patience every now and then. Investors need to stay put for long for better returns

More than half of the portfolio allocated to smaller companies means the fund will be highly volatile - something that's well reflected in the fund's standard deviation, the second highest in the category. Investors need to stay put here for a longer period to get the best out of this fund.

Magnum IT hit the headlines last year through a trailblazing performance under the leadership of erstwhile fund manager Sandip Sabharwal. Like many other Magnums, Sabharwal removed the label of mediocrity from this fund as well during his eight-month stint last year. However, he left the fund house in November last year and since then the fund has seen three manager changes. Though the fund house has more or less continued with Sabharwal's picks, the fund has lost some sheen.

Against huge out-performance in 2005, the fund underperformed in the first quarter of 2006. During the recent crash as well, the fund was among the worst sufferers. It would be interesting to see how the new manager, Nimesh Chandan, manages the volatility ahead with a portfolio dominated by small-cap stocks. To start with, he has improved the diversity of the portfolio and cut exposure to individual stocks.

Before Sabharwal, the fund's performance was patchy. Magnum IT used to deliver good returns but the good patches were highly inconsistent, resulting into average returns for its investors. Sabharwal changed this for the fund. He turned the tide in favour of Magnum IT by overhauling the portfolio completely. Large-cap stocks, which used to form the core of the fund, made way for small-caps. Though this strategy resulted into higher volatility, it worked well for the fund. For the first time, Magnum IT earned the top slot by delivering 65.40 per cent return in 2005, much more than the 54.20 per cent gain of the second-best fund in the category. Today, maintaining consistency is the biggest challenge that a fund manager faces here. The new manager has taken a few good steps but he would be tested by the prevailing uncertainty in the stock markets.

For investors, patience is the key here because a portfolio dominated by smaller companies will continue to be highly volatile. The fund needs to do much to become the top pick among the technology funds.