Software stocks continue their tryst with the investor's fancy. Over the last 12 months, the BSE IT sector has appreciated by 44.6%. How much has the BSE Sensex appreciated over the same period?Only 31.5%! Little wonder then that technology funds continue to fire the investor's imagination.

To be sure, we at Personalfn have never been great enthusiasts where sector funds are concerned. The risks associated are too high and sector funds go against the very grain of mutual fund investing, which is diversification. Most investors are not sophisticated enough to make informed calls on specific sectors like software, pharma and fast moving consumer goods (FMCG). Consequently they are the first ones to enter and the last to exit from sector funds. Without doubt, this can be a perfect recipe for disaster.

Tech Funds are setting the pace

Tech Funds	NAV (Rs)	1-Mth	1-Yr	3-Yr	SD	SR
FRANKLIN INFOTECH (G)	25.70	8.07%	51.53%	36.93%	8.34%	0.28%
DSP ML TECHNOLOGY.COM (G)	9.55	4.03%	43.18%	43.53%	7.91%	0.37%
ALLIANCE NEW MILLENNIUM (G)	8.08	3.86%	42.50%	38.52%	8.24%	0.33%
TATA LIFE SCIENCE & TECH (A)	21.50	6.30%	41.76%	37.25%	7.43%	0.51%
MAGNUM IT FUND	10.08	4.35%	38.46%	26.75%	8.29%	0.26%

(Source: Credence Analytics. NAV data as on Nov 11, 2004. Growth over 1-Yr is compounded
annualised) (The Sharpe Ratio is a measure of the returns offered by the fund vis-à-vis those offered by a risk-free instrument) (Standard deviation highlights the element of risk associated with the fund.)

That is not to say that software funds are perpetual, loss-making investments. Far from it! The runup in the BSE IT over the last year is testimony to how much informed investing in sector funds can do for the investor. Moreover, the prospects of the software sector show no signs of flagging. Some factors that are working for the domestic software sector:

• Global technology spending is on the rise.
   

• A demand shifting from low-end services to high-end ones, like IT consulting, package implementation and systems integration.
   

• Indian software companies provide a broad range of services and have proven capabilities in executing large and complex projects.

But Diversified Equity Funds have done better

Diversified Equity Funds	NAV (Rs)	1-Mth	1-Yr	3-Yr	SD	SR
MAGNUM GLOBAL	15.38	4.48%	63.42%	46.27%	8.08%	0.54%
HDFC CAP BUILDER (G)	29.93	6.97%	61.20%	48.33%	7.37%	0.57%
FRANKLIN INDIA PRIMA (G)	92.35	7.40%	50.33%	71.43%	8.70%	0.58%
RELIANCE GROWTH (G)	95.43	5.66%	48.25%	72.17%	8.05%	0.62%
BIRLA MIDCAP (G)	26.85	7.92%	46.88%	0.00%	7.70%	0.50%

(Source: Credence Analytics. NAV data as on Nov 11, 2004. Growth over 1-Yr is compounded annualised)

That is not to say that its time for investors to turn their backs on diversified equity funds. Actually, there is never a time to turn your backs on diversified equity funds. Diversified equity funds invest in a bouquet of stocks/sectors that have the potential to deliver above-average growth going forward. And if technology is one of those sectors, then you can be sure your diversified equity fund manager will be buying a lot of technology stocks.
 

If you own about 4 diversified equity funds with an average of 15% in technology stocks, you already have a reasonable portion of your assets in technology, which is about as good as owning a full-fledged technology fund. Actually it's a lot better than owning a tech fund, because the balance 85% of your assets (in 4 diversified equity funds) are spread across other sectors that can also deliver steady growth and also provide a cushion in case the technology sectors fails to live up to expectations.

So owning a tech funds may make sense, as you don't want to turn your back on the growth potential of the tech sector either. However, make sure that technology funds constitute only a portion of your overall portfolio (maybe 5-10% of assets). Remember your diversified equity funds can hold technology as well so buying several tech funds could make it a case of too much of a good thing.

 

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