Where’s the Money Gone?

The Indian mutual fund industry is more than 43 years old with the Unit Trust

of India being the biggest players managing a corpus of more than Rs 50,000

crore. As this trust began to diminish following various scams, the private

mutual funds benefited immensely. The emergence of private mutual funds also saw

various products offerings suited to different types of investors. Sector

specific mutual funds were one of them and currently atleast 11 mutual funds

have funds dedicated to technology and new economy stocks.

Other specific mutual funds include Index, FMCG, Life Science,

Pharmaceuticals & Healthcare and Petro Funds. The aim of introducing IT

focused funds was the lack of understanding of the IT sector by lay investors

and the booming share prices of the stocks.

While the launching of IT/ new economy sector specific mutual funds were

commendable, the irony was that most of these funds were launched just before

the peak time. Consequently, most of the mutual funds invested at very high

valuations and also out performed the indices for a short time till the IT

prices peaked. Thereafter, these funds have been a major disappointment as the

software stocks crashed by almost 50-90% within the last 2- to 3 years. A look

at the IT sector funds reveals that almost all of them have reporting negative

returns in the past 3 years.

The IT specific funds have been hit harder after the recent announcement of

the results by Mastek and Infosys Technologies. Infosys Technologies formed the

top position in the portfolio of all the top 6 IT specific mutual funds and the

40% decline in the share price of Infosys after the results come as a shock to

these funds.

While in overall terms, all the funds listed here have declined in NAV terms,

in the past one year, all these funds have outperformed the BSE Teck, an index

to track the moment of IT stocks, which declined by 23% whereas these funds have

declined less and within the range of -2% to -19%. Over a three yearthree-year

period, 4 out of the 5 funds listed here have outperformed the BSE Teck index.  

Before one starts investing into IT focused mutual funds. Two questions needs

to be answered. Firstly, is it a good time to invest into IT stocks and secondly

whether you feel you are better off letting professionals handle your money than

making buy and sell decisions yourself. The first question is of course the

harder one especially at this point of time as the entire IT sector goes through

a re-rating.

We believe that the IT sector will remain one of the best performing sectors

in India and while in the short term shares would decline as companies report

poorer results, the long term fundamentals of the sector cannot be questioned.

Whether or not to invest into mutual funds is more a question of time and

inclination on the part of the individual rather than anything else. Given the

increasing professionalism in the Indian Mutual Fund industry, it may be a far

wiser decision to save the hassles of tracking your investments and let fairly

well informed professionals to do the job.

UTI Growth Sector Fund



UTI’s growth sector software fund is the largest technology specific
open-ended fund with a size of Rs.  175.05 crore as on 28th February 2003.

The fund was one of the few sector specific funds set up by UTI to take

advantage of the opportunity of the fast growing sector. The investment

objective of the fund is to invest atleast 80% of the total funds in equity and

equity related instruments of software companies. As on 28th February 2003, 74%

of the investments are were in software, 9% in diversified, 6% in entertainment,

2% in Tobacco, and less then a percent in Telecom. Infosys was the top holding

in terms of value of net assets at 21%, Satyam Computer Services was at 11%,

Wipro at 9%, Digital GlobalSoft at 8% and iI-Flex Solutions was at 6%. Other

prominent investments were in MphasiS, HCL Technologies, Zee Telefilms, CMC and

Polaris Software Labs. 

Franklin Infotech Fund



Formed in August 1998, the dedicated technology fund currently from Franklin

Templeton Investments has a size of Rs. 156.92 crore. The fund has suffered a

severe set back with the fall in the IT stocks over the past couple of years. As

on 31st March 2003, FIF had invested 34% of the assets in Infosys, 12% in

Digital GlobalSoft, 10% in Satyam Computer Services, 8% in HCL Technologies and

7% in MphasiS. Apart from these investments, the FIF portfolio consists of

almost all the leading Infotech stocks such as Wipro, Polaris Software Labs,

E-Serve, i-Flex Solutions, Hughes Software, Mastek, Infotech Enterprises and

CMC. During the quarter ended March 2003, the company reduced its exposure in

equity from 96.7% to 88.9% retaining cash for money market operations and an

increased holding in Digital, Polaris, CMC and HCL Technologies. New stocks that

were added were Hughes Software and Mastek.

Alliance Millennium Fund



Alliance Millennium Fund is one of the major firms that doesn’t have
Infosys as their top holding. More than 95% of the fund’s investment is in

equity, 2% in debt and the rest in the money market. The size of the fund was

Rs.150.82 crore as on 31st March 2003. The fund’s holding in terms of value in

Digital GlobalSoft formed 17% of the net assets followed by E-Serve at 12%,

Bharti Tele Ventures at 12%, MphasiS and Mastek at 10%. Other major investments

are in Infosys, Hinduja TMT, Balaji Telefilms, Satyam Computer Services, and ETC

Networks.  

Birla IT Fund



Birla IT fund was formed in January 1995 and invests only in the IT sector.
The fund has 67% exposure to IT services, 12% in Computer hardware, 3% in

Electrical Equipment and the balance in money market. The total fund size as on

31 st March 2003 was Rs . 49.31 crore and the top holding in terms of value was

Infosys Technologies, which formed more than 12% of the net assets followed by

Moser Baer at 11%, Mastek at 8%, iI-Flex at more than 7% and VisualSoft

Technologies at 7%.

The other major investments are in MphasiS, E-Serve International, CMC,

Digital GlobalSoft and Polaris Software Labs.  

The ICICI Technology Fund



The ICICI Technology fund was formed to invest in equity and equity related
instruments in the new economy sectors such as technology, telecommunications,

life sciences and media with an aim to provide long-term capital

appreciation. As on 31st March 2003, the fund size stood at Rs 111.27 crore.

Holding in Infosys was at 15%, HCL Technologies at 8%, Digital GlobalSoft was

at more than 8%, iI-Flex Solutions was at 7% and MphasiS was at 8%. Other major

investments were in MTNL, Crane Software, Mastek, CMC and Satyam Computer

Services. Overall, investment in Software was at 76%, Telecom was at 9%,

Pharmaceuticals at 2%, Entertainment at more than 1% and hardware at less than

1%.