The Hindu Business Line : Distorting cash component of IT funds

ALMOST all IT sector funds have trailed the BSE IT Sector Index in recent months. This is because of their cash component, says a Crisil study. A look at how these funds were invested at the end of September 2002 reveals that, on average, only 80 per cent of their assets were invested in equities.

With one-fifth of their net assets in cash, IT sector funds would be hard-pressed to beat any benchmark index when stock prices rise. What needs to be seen is if the ability of the fund manager to move into cash adds value when stock prices are down. Overall, their performance over a longer time frame can only indicate the impact of `market timing'. Market timing refers to the ability of the fund manager to move in and out of stocks and cash.

In any case, for IT sector funds, an IT sector index may not be a proper benchmark. The top three or four stocks would account for close to 80 per cent of the value by market capitalisation in the IT sector indices. In reality, IT funds can hardly take that kind of concentrated exposures. Therefore, what investors should probably expect from such sector funds is significantly superior performance compared to a broad-based index such as BSE 500 over the long term. The returns must be substantially higher than a diversified market index because investors are looking at a concentrated portfolio (which carries higher risk) instead of a diversified portfolio.

However, the cash component of IT funds is a distorting feature when comparing returns for the shorter term or even for a one- or two-year period. At present, the cash component in IT funds varies between 38 per cent for Chola Freedom Technology and 5 per cent for Sun F&C Emerging Technology. So, it is difficult to judge if a fund's investments have fared better than the others.

The superior or inferior performance may be solely due to the different cash positions. However, over a longer term — say, over five years — the performance can be compared. That is because over this period the fund has to meet its mandate of investing in IT stocks, irrespective of the strategy followed.

However, in the near term, investors have to be wary while evaluating funds with a cash component.

Suresh Krishnamurthy

Send this article to Friends by E-Mail
Comment on this article to BLFeedback@thehindu.co.in

Stories in this Section
Do's and don'ts for investors

Old private sector banks — Bent but not broken

Learning new survival ways

Thinning spreads, bulging NPAs

Bankable bets

Now you can have forex accounts

Sundaram Gilt Fund: Sell/Avoid fresh exposure

Franklin India Bluechip Fund: Invest

Kotak Mahindra K-30: Switch