Technology funds turn unattractive

Invest in diversified equity funds or in banking funds if you are keen on exposure to sectoral funds

There is always a risk of investing in sector funds. When things are good, they give spectacular returns. But when things go bad for the sector, there is no place to hide. Such is the case with technology funds currently. The second quarter results of the top-rung information technology (IT) companies have been below expectations. In addition, the future outlook as spelt out in the companies' guidance, too, has been below market expectations. This is reflected in the returns of IT sector funds. In the last one year returns from these sector funds have been in the range of minus 4.77 per cent and minus 9.81 per cent. So, if you have invested in IT funds, should you remain invested? How long will it before the trend changes for the IT sector?

Alok Agarwala, senior vice-president and head, investment analytics, Bajaj Capital, said European and US banks, which contribute a significant percentage to the revenues of the top Indian IT companies, have been hit due to the global economic slowdown and negative interest rates scenario. This has in turn, impacted the margins of the IT firms. "There are five technology funds in India and in most of them Infosys has the highest weight, as high as 35 per cent in some cases. The top five or six IT companies contribute 60-65 per cent of the AUM of these five funds, making the portfolio a concentrated one, and hence risky. The second rung companies are not very liquid and fall in the mid-cap space. So, for investors too it is a good idea to get out of IT sector funds now. Besides, most fund managers of diversified equity funds have also reduced exposure to the IT sector,'' he points out.

Says Navneet Munot, CIO, SBI MF: "While the IT sector has been going through a challenging period, some of the companies would be able re-engineer their business model and will be in a position to capitalise on the new opportunities like analytics, cloud computing, artificial intelligence and overall digitalisation and internet of things. After a great run of 25 years the current business model is under pressure. But, some companies can reposition themselves. However, it would be a long drawn process before the trend changes for the sector,'' he says.

An investor who invests in a sector fund would have a specific view on that sector. If that is the case then one should go by one's view. But if you are a general investor looking to play a sector then it is prudent to get out of IT funds and get into a more diversified equity fund, says Kaustubh Belapurkar, Director of Fund Research, Morningstar, India.

The problem with a sector fund is that a sector does well for one or two years and then goes out of fashion. But most investors enter when the sector is already down. That is why it is not recommended to have more than 5-10 per cent of one's equity portfolio in sector funds. On the other hand, in a diversified equity fund, the manager can go overweight if he is confident of the sector.