Why tech funds are worth a look

Once regarded as the nemesis of stock markets, the technology sector has shown a fabulous turnaround since the dotcom bust.

All diversified equity funds have a substantial holding in technology stocks. As many as 149 of the 154 diversified equity funds have investments in the technology sector. Out these, 60 funds have technology stocks as the top holding. If you take all these mutual fund portfolios together, then it can be said diversified equity funds have 12.33% of their total investments in tech stocks. This is far higher than any other sector.

Investors now regard them as wealth creators rather than speculative stocks.

Technology funds have recovered well from the bruises inflicted upon them during the dotcom bust of 2000.

Technology funds as a category have delivered annualised returns of over 22% in the last seven years. This includes the dotcom bust of 2000 and 2001.

In May 2004, BSE IT (index that tracks only tech stocks) fell by just 3% when other sector indices and the Sensex made double-digit losses.

Again, during the recent decline of May 2006, the BSE IT fell much less than the other sectors.

In fact, technology stocks have been among the stocks that fell the least during the last two instances of steep market fall, when the Sensex dipped by more than 10% in one month.

Here we show you the returns of the BSE IT and compare it with the performance of other tech funds.

* As on June 30, 2006

Birla Sun Life New Millennium

The fund had a woeful beginning in early 2000. The next two years were not good either. Within tech funds, this fund was among the worst performers. Since then, however, its fortunes have turned for the better.

Overall, the fund's comeback is encouraging. The few changes it has undergone make it one of the better technology funds around. Investors should concentrate on how the new management manages the fund.

Three-year return: 51.94%
Two-year return: 46.69%
One-year return: 33.61%

DSPML Techonology.com

Two fund manager changes in the last six months might not impress investors, but we feel they have several other reasons to stay with this fund.

By far the most consistent member of the tech category, this fund offers a well diversified portfolio spread over large-cap, mid-cap and small-cap stocks. Another asset is its low volatility. We believe it is one fund that is well equipped to handle this turbulent sector.

Three-year return: 50.98%
Two-year return: 43.31%
One-year return: 31.72%

Franklin Infotech

May end, Infosys accounted for over 38% of the portfolio. Nearly 88% of the total investments were in just five stocks. This is a very aggressive and concentrated fund. Invest here if you can withstand huge volatility and have lots of courage.

Three-year return: 49.24%
Two-year return: 42.02%
One-year return: 30.98%

Magnum IT

This fund is very volatile. Though capable of delivering exceptional returns, it will surely test your patience now and again. Since it has predominantly invested in small-cap stocks, investors need to stay here for a longer period to get the best out of this fund.

Three-year return: 53.62%
Two-year return: 49.83%
One-year return: 47.54%

Prudential ICICI Technology

It earns huge returns in favourable times but is yet to master the art of protecting those returns in bad times. Patient investors willing to stay invested for the long-term and willing to take a lot of risk should have a look at this fund.

Three-year return: 48.27%
Two-year return: 40.61%
One-year return: 25.00%

This article appeared in Mutual Fund Insight, a magazine brought out by mutual fund research outfit Value Research.