The Hindu Business Line : Fund Talk

I had invested in PruICICI Technology Fund during its initial offer about five years ago. After seeing its NAV fluctuate from Rs 7 to Rs 2 and now to Rs 11 again, I am totally confused about what to do with my investment. This investment was done with some money gifted to my son by his grandparents and I had a horizon of 15-18 years. What is wrong with my strategy? Should I churn my investment or continue with the same fund?

Sapna Samyal

Investing in sector funds with a 15-20 year horizon is not an appropriate strategy. When you choose a good diversified fund with a track record, you can afford to stay with the fund over a long period, monitoring its performance periodically to ensure that you are on track to meeting your financial goals. Investments in sector funds, however, require you to be a more active investor. Such funds allow investors to take a concentrated exposure to a sector at a time when its prospects look upbeat. However, as market experience tells us, no single sector can stay in fancy for too long, as stock performance follows the ups and downs of business cycles. The software sector, considered structurally immune from business cycles in the 1990s passed through a cyclical downturn in 2000, post the global dotcom and telecom meltdown.

To make money from sector funds, you should be able to time your entry and exit right. In most cases, the bulk of the returns from a sector fund are earned over a short period. While it is easier to enter a fund when it is in fancy, booking profits at the peak calls for a superior understanding of the industry. You have to keep track of current trends in the industry and understand their implications.

What's more, sector funds should not form a significant part of your investments, as the portfolio's performance would be influenced by the performance of one or two sectors. A sudden change in market perception of the sector could lead to substantial erosion of your capital.

If you wish to build a portfolio for your son, choose diversified equity funds that have a long- term track record. Diversified funds will build wealth more steadily as they are less risky. Such funds also routinely outperform the market by investing in prevailing sector themes and focusing on top picks in the industry. You can retain PruICICI Technology for now as the outlook for the software sector is bright. The portfolio also looks promising. The fund holds about 25 stocks, which is large compared to other tech funds. About 35 per cent is invested in media and pharma stocks. Holdings straddle both frontline and middle-rung companies, which gives it a more diversified profile.

However, the fund should account for less than 10 per cent of your portfolio. The market has a low tolerance to earnings disappointment from software companies. The current mix of large and mid-cap stocks in the portfolio also suggests that the fund may take a knock in performance if there is a slowdown in IT spends in the US.

Mid-cap companies with a higher proportion of revenues from software development may suffer, as discretionary spends on new projects are the first to be pruned in a slowdown. For a passive investor, it is advisable to set a realistic target return and book profits on a periodic basis.

(with inputs from Krishnan Thiagarajan)

Queries may be e-mailed to mf@thehindu.co.in, or sent by post to Business Line, 859- 860, Anna Salai, Chennai 600002.

Shanthi Venkataraman

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