Tech funds' decline accelerates

Divided we came, united we fall! This seems to be the underlying bond between the seven technology funds, which had garnered Rs 23 billion from many investors early this year. On August 4, the net asset values of all the tech funds hit a new low as technology stocks continue falling on the bourses. In fact, the net asset values of none of the seven funds are currently above the face value of Rs 10. In July alone, the fancied stocks from information technology, communication and entertainment have seen their combined market capitalisation erode by Rs 1000 billion with a number of stocks at their six-month low.

Despite an impressive performance for the first quarter ended June 30, 2000, technology stocks have come under sustained selling pressure, largely from foreign institutional investors (FIIs). In July alone, FIIs sold equities worth Rs 14 billion as they re-allocated their portfolios to some South East Asian nations, where prices are cheaper. The sudden hike in interest rates on July 21 to defend the weakening rupee only added to the selling pressure from FIIs, with fears that the nascent economic recovery will receive a setback as capital gets expensive. Since FIIs have been overweight on technology stocks, most of the selling came in these counters.

Apart from selling by FIIs, information technology stocks have entered a consolidation phase after a strong rally in the last one-year. "Many institutional investors are adequately invested or over-weighted on the sector and incremental buying has slowed down. Speculative positions are a cause for concern and many new FIIs, who want to invest are concerned," says R Sukumar, fund manager, Kothari Pioneer AMC.

"Despite strong showing by most Indian IT companies, stock prices have failed to rev up due to poor sentiment towards IT stocks globally. Besides, most IT stocks here are fundamentally too weak to sustain current prices and need to fall sharply. However, top rung stocks have potential to go up in the medium term with the next quarter results and the market is convinced about sustainability of earnings growth," he adds.

The worst hit among the new generation technology funds is Prudential ICICI Technology, which has seen its NAV plummet to Rs 5.07 on August 4. Assuming that there have been no inflows/outflows in the fund, it has lost nearly 50 per cent of assets in the technology carnage. The fund had mobilised Rs 5 billion in January this year. From its high of Rs 10.88 on March 13, the fund has lost a whopping 53 per cent.

The e-COM Fund from IL&FS has also seen 50 per cent of its assets evaporate in the bear onslaught. The fund's NAV touched a new low of Rs 5.23 on August 4, which translates into a fall of 64 per cent from its high of Rs 14.58 in March this year.

So, what's in store for investors? Fund houses now fear that if the NAVs of technology funds bounce back to par levels, there could be redemption pressure. "No doubt the Indian mutual fund investor is maturing, but still a number of investors had entered technology funds expecting excellent returns in a short-time period. In fact, the sharp run seen in Alliance New Millennium (the first technology fund) spurred investments in other technology funds. It is this lot of investors, who had not expected such a downslide in technology stocks and would press for redemption once the NAV reaches par value," says the Delhi head of a private sector mutual fund.

At the same time, the current slump in NAVs gives an excellent opportunity to those investors who are convinced about the technology theme and are also willing to commit investments for the long-term. Else, investors will continue to have sleepless nights as NAVs swing between hope and despair!

THE FALL

Fund	Initial mobilisation (Rs crore)	NAV on August 4, 2000 (Rs)	Current corpus * (Rs crore)
IL&FS eCOM Fund	197	5.23	103.03
Alliance New Millenium	545	6.91	376.60
DSP Tech	52	7.10	36.92
K Tech	218	6.58	143.44
KP Internet Opportunities Fund	555	7.15	396.83
Pru ICICI Technology	500	5.07	253.50
Sun F&C Emerging Tech	228	6.15	161.88

* Assuming there have been no inflows/outflows from the funds.

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