Information and Technology (I.T.) sector is considered to be less risky than some interest rate sensitive sectors such as banking, auto and real estate. After the dot com boom and the subsequent bust in the year 2000, I.T. remained less favourite in the bull phase of 2002-07. But since markets entered one of the worst bear phases in 2008, Indian I.T. sector started outperforming many others. Over last 3 years, I.T. has outperformed broader markets by a huge margin. The year 2013 was exceptionally well for the sector.
 

S&P BSE I.T. vs. S&P BSE 200

Data as on January 14, 2014
(Source: ACE MF, PersonalFN Research)  

But a closer look at the graph suggests that the I.T. was performing more or less in sync with the broader markets for most part of the 3-Year period. Only from the mid of 2013 S&P BSE I.T. started outdoing S&P BSE 200.

Why I.T. sector outperformed?
One of the key contributors to this success of I.T. stocks has been the depreciation in rupee which helped I.T. exporters. Some of India’s leading I.T. companies earn majority of their revenue in USD as they have a large clientele outside India. Chart above suggests that, depreciation of rupee is a boon to I.T. companies. Rally that started in May 2013 helped I.T. stocks register massive gains. Till then someone who had invested money on January 14, 2011, would have incurred a loss about 10% till May 2013.

Relatively upbeat economic situation in the United States and the Europe in 2013 saw some improvements in the spending of companies on I.T. On back of this Indian companies also registered good volume growth. Taking a positive view on I.T. Foreign Institutional Investors (FIIs) hiked their stake in a few Indian I.T. companies over last few quarters pushing the share prices of these companies.

Performance of technology funds…
As sentiment about the I.T. remained upbeat, I.T. sector started the New Year on high note. As a result, mutual funds focused on I.T. have done well.
 

Performance of Technology Funds…

Scheme Name	3 Months	6 Months	1 Year
ICICI Pru Technology Fund (G)	17.2	48.8	52.5
SBI IT Fund (D)	10.6	38.2	44.9
Franklin Infotech Fund (G)	9.1	37.3	44.7
Birla SL New Millennium Fund (G)	10.5	35.6	41.5
DSPBR Technology.com Fund (G)	9.5	30.7	31.3
S&P BSE IT	9.3	39.5	48.5
S&P BSE 200	3.2	4.5	0.9

Returns are absolute and in %
Data as on January 14, 2014
(Source: ACE MF, PersonalFN Research)  

Although I.T. funds outperformed broader markets, only 1 among 5 technology focused funds managed to outperform S&P BSE I.T. over last 1 year. Moreover, there has been a great variation in the returns generated by I.T. focused funds. While ICICI Prudential Technology Fund outperformed DSP BlackRock Technology.com Fund with an absolute margin of more than 20.0%. This is a result of stock selection and portfolio composition. Moreover, being focused on growth of just one sector, timing of buying also plays a crucial role. Study of portfolios revealed that the exposure to individual stocks has been as high as 30% in some cases. So you can imagine what would happen to a fund when single stock exposure is so high and any unfavourable development pushes that stock down.

PersonalFN is of the view that for aforementioned possibilities one should avoid any sector or thematic fund, not only the Technology Funds. Sector funds defeat the principal of mutual funds- diversification. They rather take very concentrated bets and due to their mandate (of investing largely in a particular sector or a theme) they are forced to take exposure to a sector even though going is not good for the sector. Selecting a winning mutual fund is important to be a successful investor.

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o75dzq6zkc@outlook.com Mar 17, 2014 I love my little creidt card holder. The one I have is about 8 years old and is is the perfect size to fit in my back pocket when I don't want to carry my purse. I wish you had the fuchsia color in stock as it is easy to spot in my purse.

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