Monday, August 31, 2009

Why fund investors didn’t get their timing right


“Buy low and sell high” is a lesson mutual fund investors in India continue to ignore, as trends in money flows into mutual funds over the past two years show. Flush with funds in a rising stock market until early 2008, equity funds saw new inflows dwindle in the bear market, reviving only in the recent rally.
However, the good news is that older fund investors held on patiently as NAVs fell, and reaped gains from the subsequent rally. Another key trend was some investors shifting attention to other asset classes when returns from equities fell. Gold ETFs and income funds saw steady inflows during periods marked either by uncertainty or poor performance by equities.
The tendency to chase returns rather than anticipate them appears to have taken hold of many equity fund investors over the past two years. Net inflows into equity funds (gross sales minus redemptions) peaked, with the stock market in January-2008 at Rs 12,717 crore, though some spillover effect remained with healthy inflows in the following months. However, from April onwards, fund flows dipped as the market’s free fall continued. Behind the curve

An analysis of trends in monthly equity fund flows between early 2007 and now shows that investors have been slow to react to market spikes as well as its falls. Though the equity market was buoyant from August 2007, the gush of inflows caught up only later in November. When the market corrected in January 2008, inflows continued for a few more months.
Net flows that had turned negative following the October 2008 crash, remained so till April 2009 (but for February, which reported net inflows). They resumed in full flow again in May 2009, two months into the recovery rally. These suggest that investments, more often than not, chased good performance from equity funds.
Investments picked up after equity funds put in an average holding period return of 32 per cent between August and November 2007, and 25 per cent in the two-month period between March 2009 and April 2009.
Herd mentality, the need for assurance that the investment value will not drop immediately after committing funds, and the fear of missing out on rallies appear to be the key motivating factors for retail investors in equity funds. Such a short-term approach to equities may also have limited investor participation in the current rally, as the monthly net inflows remained unimpressive throughout last year and the first quarter of the current year.
New fund offerings also garnered larger sums during bullish phases — equity NFOs in April-January 2008 saw inflows of Rs 33,191 crore — but investors appeared to have given them a wide berth during the bear phase.
Fund houses too should shoulder some of the blame for this; as new fund launches have peaked during good times. Triggered also by fewer offerings during the period, equity NFOs garnered only Rs 2,293 crore between April 2008 and March 2009.
The revival in equities since April 2009 has seen more new funds cropping up. With positive response from investors, these have collected over Rs 3,221 crore between April and July. Reluctant to pull out

However, what’s interesting is that while new money committed to funds dropped in 2008, the year did not see any significant pick-up in redemption activity. Investors preferred to remain invested in equity funds, despite a fall in, or poor performance of, the market.
While pullouts from equity funds did pick up a little after the January 2008 correction, they dwindled considerably in the months thereafter and remained low throughout 2008. Though the average NAV of diversified equity funds plunged by 55 per cent in 2008, average monthly redemption numbers stood at just Rs 3,375 crore.
Even in October, when the equity market nose-dived to new lows, investors refrained from pulling out a large chunk of their investments. Investors took out only Rs 2,652 crore in October, compared to Rs 7,536 crore in January 2008, the market peak. Another interesting sidelight is that some investors did cash out close to, though not exactly at, the market peak. Equity fund redemptions, which began to inch higher as early as May 2007, peaked in October 2007, well ahead of the market peak in January.
That the average monthly redemption stood at about Rs 6,905 crore between April-December 2007, even when equity funds notched up average holding period returns of 73 per cent, suggests that a section of investors does constantly monitor fund portfolios and book profits.
The trend appears to be gathering strength in the recent rally too. Following the broader market rally, the average monthly redemption between May and July 2009 went up to Rs 4,082 crore.

Looking beyond equities

Spurred by the need to make up for the lack of returns in equities, a section of mutual fund investors appear to have ventured beyond equity funds too. A host of other dynamics, such as higher inflation and interest rates in 2008, may also have triggered the flow of funds into other assets.
Income funds, which primarily invest in debt securities with varying maturity periods, reported net outflows in November and December 2007 (coinciding with a rising equity market). However, following the crash in equities, fund flows into income funds turned positive and remained buoyant till the Lehman Brothers collapse in September.
While it can be argued that income funds usually see participation only from the well-informed investors (such as banks and other financial institutions), retail participation in other assets is also evident from fund flows into other categories.
For instance, net inflows into gold ETFs have been rising steadily since the January 2008 crash and 2008 saw gold ETF assets expand by about 54 per cent. Investors also appear to have taken temporary shelter in low-risk gilt and liquid funds in October 2008 following the collapse of equities worldwide. Flight to safer avenues following a liquidity crunch, both domestic and global, may explain the changed stance, especially since the asset classes saw poor inflows in the earlier months.
ELSS funds too saw a change in fund patterns. Being tax-saving instruments, these funds generally tend to report peak flows toward the end of a fiscal year.
In keeping with this, while ELSS funds did report higher net flows in the four-month period between December 2007 and March 2008 (peaked in March with Rs 2,071 crore net inflows), the risk-appetite of investors appears to have fallen sharply since.
The downward spiral in equities in 2008 led to a lower quantum of net flows between January-March 2009 (Rs 547 crore in March 2009). That these funds, notwithstanding the lock-in, saw a pick-up in redemption activity in October 2008 and more recently in June 2009 also points to the reluctance of investors to lock in funds for the long term.
Overseas investing too appears to have lost its charm, what with these funds recording net outflows since October 2008. What’s more, the funds reported a significant jump in net outflows (Rs 127 crore) in May 2009, which also coincided with a broader equity rally.


A layman's guide to interest rate futures

Interest rate futures, that long cherished dream of Indian bankers, bond dealers, and reformers will be launched on Monday. This is an instrument that will help a company fix its interest cost, irrespective of interest rate movements.
According to CNBC-TV18’s Gopika Gopakumar, after a long wait of six years, interest rate futures will yet again be traded on the NSE. Listed on the exchange will be a contract worth Rs 2 lakh. Each contract will comprise 10 year government securities with notional interest rate of 7%.
A potential investor like a mutual fund can open an account with a bank or brokerage already registered as trading members with the NSE. If the fund buys a 10-year government security from the spot market at Rs 101, and expects interest rates to rise by December, then it will ask its bank or broker to sell a December futures contract at say Rs.97.50. It pays a margin of 2.33% for the first day and 1.61% for subsequent days. Assume rates go up and the spot price of the government security falls to Rs100, then the futures contract will fall to Rs 96.60.
In this case, the mutual fund is making a loss in the spot market. But it is making a gain in the futures contract (Rs 97.50-96.60). Its loss is thus minimized to 10 paisa against one rupee if it was unhedged. On the other hand, if a mutual fund expects rates to fall, then the fund will go long, i.e. it will buy a futures contract to hedge itself. Note that in this product the investor has to physically deliver bonds when the contract matures. It can deliver any bond with residual maturity of 8-12 years.
Hemant Mishr, Regional Head-Global Markets, Standard Chartered Bank, expects active participation from institutional players both financial and the non-financial institutions. "I see mutual funds, insurance players being active players." However, he does not see active retail participation at present.



B Prasanna, MD, ICICI Securities Primary Dealership Company, says though in the initial period it will probably be institutional market participants using this product, he expect quite a bit of the retail households, broking communities to enter into the particular product going forward.

Here is a verbatim transcript of the exclusive interview with Hemant Mishr and B Prasanna on CNBC-TV18. Also see the accompanying video.

Q: This looks like complex instruments, so who will be the audience or the users, it will not be as common as currency futures?
Mishr: Yes, this won’t be as common as currency futures and it’s slightly more complex than the futures that Indian investors have seen whether its equity or currency futures. In terms of the participants in this market, I would expect institutional players both financial and the non-financial institutions, I would expect the mutual funds to be an active player, I would expect the insurance players to be there. There is a thought that the retail investors run in a risk whether it is through a mortgage or a personal loan. I don’t at this point in time expect active retail participation in this. The banks would be more critical and more active counterparties for this.

Q: It does look like it is only going to be an instrument. How useful will it be for a primary dealer and for banks, will you be able to almost negate an interest rate risk?
Prasanna: This is a very good product, it is a good for all kind of market participants, things like PDs. You can run directional trades on the long as well as on the short side using futures. You can also hedge your underlying risk like when there was a devolvement in the auction or the underwriting risk that you take in auctions, so there is a bit of something for almost all market participants in it. Having said that, I would also presume that the experience of currency futures have actually told us that the retail participants have actually come in a big way in that particular product, so though I agree that in the initial period its probably going to be the institutional market participants but going forward I would also expect quite a bit of the retail households, the broking communities to kind of enter into the particular product. To start with, it would be primarily institutional but later on it could be broad based to a lot of newer participants.

Q: If it is largely for institutions, would not the OIS swaps have done the same job. Why would this be different if institutions are going to hedge, surely they were doing the same with OIS?
Mishr: That’s a good point. The interest rate swap market has seen a lot of activity ever since they were first opened up in 1999. From a bank’s perspective, it would prefer a future for a simple reason that it’s a lot more cleaner both in terms of cash outflow and in terms of the risk in that instrument. Going forward, I see a big part of the bank’s liquidity actually going to the futures market, while corporates will continue to access the OIS market. So, when a corporate speaks to a bank, they might still might be wanting to hedge in the OIS, but the bank in turn will not want to hedge in the OIS market but would access the futures market.

Q: Will the larger economy be able to read any signals from the futures contracts in the interest rate industry?
Mishr: For the constraints that have been placed on government of India bonds, that typically is an exaggerated movement when the interest rate cycle turns. We have seen that in the past couple of weeks. I would expect positive feedback from futures into the cash market at two levels. One, in terms of incremental liquidity that comes into the GoI market, but also about trading happening across the curb. I don’t expect this to happen in the next few months or even in the next one year, but a possible situation when you got a future not only on the 10-year bond but on the five year and the one year bond which will feed into incremental liquidity and trading in the five year and the one year cash markets as well.
Prasanna: Just adding one more point here which most of us seem to have missed out ‑ the ability to strip out interest rate risk to credit risk which is inherent in a corporate bond. This is an important factor which will allow the participants to do so. Hence this product will not only add some kind of liquidity to the cash market which is what the positive feedback which Mishr was referring to, but it will also galvanize the trading in bond markets. A person who wants to take an exposure in corporate bonds can strip out the interest rate risk by shorting IRF if he wants to take the credit risk.

Q: Let me come to the product itself. The manner in which it has been launched at this point in time, does it satisfy you or do you think it needs some bit of tweaking? Are you nervous about some features?
Mishr: The process that was followed by the joint technical committee of RBI and Sebi was very comprehensive in terms of seeking market contract from a host of participants, banks, MF industry, insurance companies etc. In may ways, this is closer to what will succeed in the market place. However, it is important that we have reasonable expectation out of this. In terms of timing, this is just wonderful. With the interest rate cycle turning round and with the markets being as volatile, if I compare 2009 with 2007; the interest rate volatility on the 10 year curb at that point of time was 8% and its more like 35-40 at this point of time, so if it won’t succeed now, it won’t succeed in any point of time.

Q: How much can it neutralize the risk for say a mutual fund or bank, how much can it take out really?
Prasanna: I would still presume that the quality of the fund management team is more important because it is not a solution which is going to make you money in all kind of phases, you still have to take the right view. A derivative is something which will only make you money if you take the right view. I guess it is very important to see what kind of strategies a fund manager is employing with this product.

Q: The other problem that people or regulators rather common people will have with any derivative instrument, we know how the currency derivatives ruined or troubled the corporates and even banks, do you think this has potential for such kind of trouble, people speculating for its own sake and getting carried away because of a one way movement in the direction of trade?
Mishr: There are two points important out here. The world is migrating slowly from OTC to exchange, so there is a lot standardization happening in the OTC space that the regulators like the EUS treasury and the FSA are the few are pushing. That is the trend and trajectory, in interest rate futures. This is a relatively complex instrument compared to our currency and equity futures which is something that the investor has to keep in mind which is why I am a bit weary about proposing that to retail investors on day one. But if someone wanted to take a view on an interest rate, the exchange traded future is the best possible choice at this point in time.
Prasanna: I just wanted to make a point on what could potentially to bring this product more successful. One is the fact that there has to be a very strong linkage between the cash and the futures market for any successful derivative product launch. In that respect, I think there are a couple of things which the regulators would need to do going forward to make this product a bigger success. One is to bring about a very active inter-bank term money curb at the short end where people can really transact for lending and borrowing for 1-2-3 months which is in our market at this point of time.
The second thing is again linkages between the cash and futures means that the ability for market participants to execute arbitrage strategies both ways between the cash and futures whenever the futures deviate from the futures price. Unfortunately, even in that respect we are not able to do it on both sides because you are not having the ability to short the cash bond because there are limits as for the period which you can do it. There are very strict positional limits which would probably allow the futures deviate from its fair price for a pretty long period of time, so these are the things that the regulators need to think about going forward for this product to become a bigger success. Then, you can expect a lot of participations from corporate treasuries etc.

Q: What should be the next step in the evolution of the interest rate market?
Mishr: The next step in my opinion would be having more benchmarks to the 10-year. Whether you look at it from an institutional perspective, we run risks which are not necessarily the ten year risks. If I am running a five year risk, I think the spread and the basis risk is far too much for me to take the view on the 10 year point, so having benchmarks across the yield curve as importantly having the money market benchmark is very critical. I would see this as the first step towards non-linear products for interest rates in India.

Q: Can you explain?
Mishr: There is no reason why we shouldn’t have interest rate options in India, compared to one of the more tradable benchmarks. Once you got more liquidity in the term money market, we will have that once it is actively traded. I see this as a base market for a lot of other products which will be benchmarked and settled on this whether it’s the BSE or the NSE future’s price. We look at the LME for instance, there are lots of OTC products which the LME three month price fixes, so that in my opinion would be the next logical step.

MF houses lure investors with smart fund names

India’s largest equity mutual fund is something called Reliance Diversified Power Sector Fund, and I think that’s a problem. The problem is not with this fund as such, but in the fact the Indian investor has chosen to bestow this rank upon a fund that is narrowly focussed on a single sector. This is a problem because the core investment of every mutual investor (without exception) must always be a general diversified fund that is not constrained to invest in any theme or sector.
More than the Rs 5,300 crore managed by Reliance Diversified Power Sector fund, this problem is highlighted by the aggregates of the entire fund industry. In all, India’s equity funds manage Rs 1.68 lakh crore and an absurdly high Rs 58,000 crore (31%) is in sectoral or thematic funds. This is way too high. How high? Well, I would venture to say that it’s too high by a margin of about 100% or so. The truth of the matter is that it’s difficult to visualise an investor who should be investing through a mutual fund and yet who should be taking sector calls himself.
The very idea of mutual fund is, one is of hand off investing . You pay a fund company because you don’t have the time or the expertise to judge where to invest. An important facet of this decision-making is to decide which sector to invest in. When you decide that say, 25% of your investments should stay in a power or an infrastructure or a technology fund, then you are making decisions that you shouldn’t . The way to make mutual funds work for you is to put your money only in diversified funds and then let their fund managers do their job of choosing which sector makes sense and when.
Of course, I’m being a little disingenuous here. No investor sits down and actually decides how much to invest in this or that sector. No, that decision gets taken for them by the manner in which funds are marketed and how investors react to the message.
Even the name of the fund plays an important role. According to its name, Reliance Diversified Power Sector Fund is both a diversified as well as a power sector fund. That’s a complete contradiction in itself. If you are a sector fund then you can’t be diversified. And in any case, how the average investor is to figure out what the name actually signifies.
Consumer goods style naming is not uncommon in mutual funds. We have a DSP Blackrock T.I.G.E.R. fund (which supposedly stands for The Infrastructure Growth and Economic Reforms), Sundaram BNP Paribas S.M.I.L.E. (Small and Medium Indian Leading Equities), ING C.U.B. (Competitive Upcoming Businesses), Morgan Stanley A.C.E (Across Capitalisations Equity), Canara Robeco F.O.R.C.E. (Financial Opportunities, Retail, Consumption & Entertainment), and ICICI Prudential Ninja (Nifty and Nifty Junior Advantage).
These are only some of the more fanciful names that have been thought up to sell funds. Clearly, fund companies have a very different idea of what works than what a thoughtful investor should be doing. But I guess that is a comment both on how investments are bought and how they are sold.

HDFC MF files offer document for Banking and Financial Services Fund

HDFC Mutual Fund has filed an offer document with securities and exchange board of India (SEBI) to launch HDFC Banking and Financial Services Fund, an open-ended equity scheme.
The new fund offer (NFO) price for the scheme is Rs 10 per unit.

Investment objective:The investment objective of the scheme is to generate long term capital appreciation from a portfolio that is invested predominantly in equity and equity related securities of companies engaged in banking and financial services.
Plans:The scheme shall offer growth and divided option. Dividend option offers divided payout and dividend re-investment facility.

Asset allocation:The scheme would invest 65% to 100% of asset in equity and equity related securities of companies engaged in banking and financial services, with a risk profile of medium to high. The scheme would invest 0% to 35% of asset in equity and equity related instruments of companies other than banking and financial services, with a risk profile of medium to high. The scheme may invest 0% to 35% of asset in debt and money market instruments including investments in securitized debt, with low risk profile. Investment in securitized debt shall not exceed 20% of the net assets of the scheme.

Load structure:Entry load charge is not applicable for the scheme. In respect of each purchase / switch-in of units, an exit load charge of 1% is payable if the units are redeemed / switched-out within 1 year from the date of allotment. No exit load is payable if units are redeemed / switched-out after 1 year from the date of allotment.

Minimum application amount:Minimum application amount for purchase will be Rs. 5,000 and any amount thereafter. For additional purchase the amount will be Rs. 1,000 and any amount thereafter.

Target amount:The minimum subscription (target) amount of Rs. 10 million is expected to be raised during the NFO period of HDFC Banking and Financial Services Fund.

Benchmark index:The scheme`s performance will be benchmarked against BSE Bankex Index.

Fund managers:The fund managers of the scheme will be Vinay R. Kulkami and Anand Laddha.

Reliance MF announces changes under Regular Savings Fund - debt option

Reliance Mutual Fund has decided to revise the maximum investment limit for Reliance Regular Savings Fund - debt option.
Revised maximum investment limit:Accordingly the maximum investment amount per investor (across all folios) is Rs 10 million.
Existing maximum investment limit:The maximum investment amount per investor (across all folios) is Rs 50 million.
The aforesaid revision will come into effect from Sep. 1, 2009.
Reliance Regular Savings Fund is an open ended scheme which seeks to provide the choice of investing in debt, equity or hybrid options with a pertinent investment objective and pattern for each option.

Standout performers

BIRLA SUN LIFE MID-CAP PLAN A
It started as a middle-of-the-road performer and began to take on the competition from 2006. Savvy sector selection is the primary reason for its above-average returns.
Betting heavily on engineering and services proved fruitful in 2006. In 2007, it capitalised on the rally in metals, financial and engineering. And, in 2008, it fled to FMCG and healthcare. The fund manager is now focusing on construction, capital goods, power and cement.
The portfolio is churned quite frequently, with nearly 40 per cent of the stocks making an appearance for less than six months. Nevertheless, this fund can't be called aggressive. In fact, it avoids concentrated bets. Since 2005, no sector has breached the 20 per cent mark (though this is quite a high limit) and no single stock has crossed an allocation of six per cent.
What's interesting is the fund manager's flexibility. At the end of 2008, he was heavily into debt, which he totally offloaded in early 2009, to significantly move into cash.
During market rallies, this fund does make its mark. Yet, during downturns, it will not dramatically stray from the category average. But its appeal lies in the fact that over the long run, it rewards its investors. In the three-year and five-year periods as of July 31, 2009, the fund returned 19 per cent (category average, 9 per cent) and 30 per cent (category average, 24 per cent), respectively.

IDFC PREMIER EQUITY PLAN A
There's no arguing with the numbers. In its history, this fund has underperformed the category average in just two quarters out of 14.
In 2007, it trounced the competition with a return of 110 per cent (category average, 64 per cent). In the bear phase, running from January 2008 to March 2009, it shed 54 per cent (category average, minus 64 per cent). Its three-year trailing returns of 30.45 per cent (July 31, 2009) places it streets ahead of the competition.
Hats off to fund manager Kenneth Andrade, who boldly rides his bets. Little wonder that allocation to services touched 44.74 per cent (May 2007) or FMCG accounted for 21.66 per cent (March 2009). Neither does he shirk from taking contrarian stands; his bias towards services ever since inception and his restraint from going heavy on energy, despite the sector gaining impressively, are cases in point.
With a focus on small companies, Andrade has an interest in keeping the fund's size small. He maintains a tight portfolio spread across 26 stocks (one-year average), whose allocations don't cross seven per cent, barring Shree Renuka Sugars.
Since Andrade took over the fund in February 2007, he has maintained a high debt allocation, which peaked at 25.53 per cent (June 2008), while cash peaked at 12.24 per cent (May 2008). Due to these high allocations, he missed out on the latest rally to some extent ,with a return of 91 per cent as against the category average of 104 per cent (March 9-July 31, 2009).
However, the fund's history still makes it a compelling pick.

SUNDARAM BNP PARIBAS S M I L E Regular
Though a category beater in 2006 and 2008, it didn't deliver headline grabbing returns. Its performance of 81 per cent (category average, 64 per cent) in 2007 brought it in the limelight.
Fund manager S Krishna Kumar timely increased the allocation to metals from 6.5 per cent in June 2007 to 13 per cent in July and maintained it around those levels till the end of that year. The sector gained 89 per cent during the July-December period. The allocation to energy and engineering towards the end of the year also helped.
Recently, the fund manager doubled exposure to metals from six per cent (May) to 12 per cent (June) and the fund delivered remarkably in the bull run from March 9 to July 31, 2009, with a return of 117 per cent (category average, 104 per cent). Being heavy on energy also helped.
Right now, he is bullish on energy, industrials, IT, auto and sugar.
What's interesting is that he delivered impressively during the latest rally, though cash exposure averaged at around 14 per cent between February and April.
With this offering, you may be sure of ample diversification amongst sectors, as well as stocks. Overall, it's a good performer, with a three-year trailing return of 19 per cent (category average, 9 per cent) as on July 31.

IT will be closely watched in months to come

An average return of 105% over the past six months --that is what an average technology sector fund has given. During the same time period, an average diversified equity fund delivered 77% and the Sensex returned 77.48%.

After a lull of close to two years, things seem to be looking up for these funds. In part, this has also been due to the falling rupee, which in turn, has meant more bang for each buck these companies which essentially earn their revenues from overseas. Comparing the performance of the IT sector with others, we find that the sector has emerged the third-best performing since the beginning of this year. The top two best performing sectors were metal and auto. However, this is in stark contrast to the trend in 2007 and 2008, where the sector was among the worst performers.
The period between 2003 and 2007 was the longest and most profitable bull run in the history of the Indian economy; The Sensex moved up from 3390 points to 20286 points. In 2003, the IT sector specific mutual funds managed to deliver 71.43% returns, while in 2006 they delivered 45.57% return. These returns were outstanding compared with the returns clocked by BSE IT.
This bull phase was brought to an end by the sub-prime crisis. The sub-prime crisis reared its ugly head for the first time in mid-2007 and severely hampered the outlook for technology companies, most of which depended on revenues from the overseas clients.
During 2007, share prices of the giant IT companies such as TCS, Wipro and Infosys hit rock bottom as they dipped in the vicinity of 50%. In the initial months of 2007, the prices of TCS hovered around Rs 1,300, which dropped to approximately Rs 944 by November. A similar trend could be seen in the case of Wipro and Infosys. These scrips were among the most popular within the IT sector.
The scenario in the current year stands in stark contrast to the trend over the past two years. The performance from January 2009 till date, on an average, has been as high as 77.52%. The stock prices of companies like Wipro and Infosys have moved up, on an average, by more than 100%. The sector-specific mutual funds consequently increased their exposure in core technology companies to 74.35% in July from 61.97% in January 2009.
For more than a decade, the technology sector was aggressively courted by mutual fund schemes. In fact, paying little heed to principles of diversification, mutual fund schemes hoarded technology stocks. And then came the dismal dotcom bubble burst phase of 2000-01 and mutual funds in India learnt the lesson of diversification the hard way. While better diversification in portfolios emerged, technology stocks, however, continued to take the centrestage in the portfolios of diversified equity schemes.
The data reveals that up until March 2007, the allocation to technology scrips by the average diversified equity fund rarely dropped below 10%. As an average, across a wide range of diversified equity schemes, this number is large. However, the allocation to the sector almost halved during 2007. Since March this year, there has been a trend reversal of sorts with a discernible uptake in the positions taken in the IT sector. However, it remains to be seen whether the sector will win back patronage of diversified equity schemes.
A similar trend is evident in case of sector schemes. Sector schemes, by their nature, can at best stack money in cash, in case of absence of any lucrative opportunity in the sector. However, this hasn't been the case for technology sector funds. There was a discernible move towards allocating funds to alternate sectors such as telecom and entertainment. DSP BlackRock Technology.com was a trendsetter in this respect. The fund management had enough foresight to include a broader segment in its investment objective. In fact, it is only after DSP BlackRock Technology.Com tasted success with its investments outside core technology companies that other IT sector funds began to diversify their holdings. The only scheme that refrained from doing so was Franklin Infotech Fund, which consistently invested in core technology companies. At the same time, some fund houses like UTI and Kotak discontinued their technology schemes and merged these with other diversified equity schemes.
The key to sustaining this recent performance by the sector will hinge on the rate of recovery in the western economies. While domestic demand has enabled the sector to stay afloat, larger gains will come from businesses overseas. Whether the current scenario marks a trend reversal is yet to be clear, but we are certain that this sector will be closely watched over the coming months.