Tech funds - the key is timing

MUTUAL UNDERSTANDING

6.64 0.36  Higher risks
The performances are a pointer that while sectoral funds, especially tech funds, can do well for limited time-frames, the idea of trusting these funds over a longer period without taking into account the vagaries of the markets and the sector is fraught with danger.  The normal risk-return parameters like standard deviation (a statistical measure of the range of a fund's performance over a period) and the Sharpe ratio (a measure that assesses performance adjusted for risk) for tech funds tell their own story.  While leading diversified funds like Alliance Equity Fund, Birla Advantage Fund and HDFC Equity Fund have a standard deviation of 7.22, 6.78 and 6.67 respectively, for leading tech funds it is usually in the region of 8-9.5.  The higher standard deviation means that the variance in performance of these funds has been high. As far as the Sharpe ratio is concerned, leading diversified funds have a ratio in the range between 0.35 and 0.45, while for tech funds it is lower at 0.25-0.30. The higher a fund's Sharpe ratio, the better its returns are relative to the risk taken by it.  Given the risk factors, it stands to reason that tech funds, which are considered the most volatile, are investment vehicles that need to be treated with utmost caution.  Fund managers themselves are cautious about the future of technology funds, though they are generally bullish on the sector as a whole. The lessons of 2000 are still fresh in the memory for many.  "When we launched our technology product, we thought the environment will be a little more consistent. But it has been really volatile, in India and US," says Anup Maheshwari, senior vice-president and head of equities at DSP Merrill Lynch Mutual Fund.  "This is a sector where there are a lot of macro factors that influence it. So it is difficult to give a consistent view across a longer time-frame," cautions he.  Know when to exit
Are tech funds not for the retail investor? Apparently, the vagaries of markets are such that timing, especially in tech funds, is becoming important.  "In IT timing is an issue," confesses Maheshwari. "From a long-term perspective the sector will do well and create value. But how much and on what time-frame are very difficult to tell. So it is not going to be as secular as one would like it to be."  Hemant Rustagi, chief executive officer of Wiseinvest Advisors, agrees that sector funds have the potential to outperform diversified funds.  "It is a question of getting it right. When we advise investors on equity we advise them to allocate 10-15 per cent of their portfolio to sectoral funds, depending on which sector is doing well. If you time sector funds, they will definitely make you money. You can't have a long-term philosophy on sectoral funds. You have to know when to get in and when to get out," he adds.  But given the air of optimism regarding the technology sector, these funds may be worth a look. Large players in the IT sector, which fund managers are banking on, should be able to match their past performances.  But given the macro factors that effect the sector in myriad ways, that may be a tough call to make. According to Maheshwari, the key for future performance is that companies should be able to come up with good numbers in the next few quarters also.  "It is also important that none of the variables is disturbed. Volumes have to continue to grow. Pricing environment has to remain firm. One worry is that the rupee might end up appreciating. That could hurt IT companies. Tax reforms for the IT sector or the lack of it in the next Budget could also be a factor. These are things that are not factored into people's views right now. The ability of technology companies to replicate their recent performances will depend on getting all these factors right. If any of these variables act up, then it might be difficult to perform the way they have done this year," cautions he.  In short, what analysts and fund managers are saying is this: it is not yet time to be bearish on IT. Fundamentally the sector looks okay. But there are external factors which will have a say in IT companies' fortunes.  Given those risks, it is a moot point whether tech funds are an attractive option right now. If you are willing to take the rough with the smooth, then it may be worth a shot. But timing your descent may be the key to riding the tech bull.