ave a query regarding mutual funds? Maybe we can help.

• Drop us a line and our mutual fund experts, Value Research, will do the needful.

I invested some money in Prudential ICICI [Get Quote] Technology Fund at the time of its launch in March 2000.

The Net Asset Value at which I got the units was Rs 10.20.

When the market crashed, I bought a few more units of this fund at a NAV of Rs 5.

Hence, the average price at which I purchased the units was Rs 8.

In the last five years, it seems all the funds have performed and grown, except this one.

What do you suggest? Should I keep my money locked in this fund and look at the long term? Or should I sell the units of this fund? 

Also, why is this particular fund not able to grow?

- Amit Maheshwari

The tech funds saga

The story of Prudential ICICI Technology Fund is no different from many other technology funds launched at around the same time.

All of them suffered when the tech bubble burst shortly afterwards.

What you must understand very clearly is that this is a sector fund. Since these are funds that invest only in a particular sector, they are much more risky than a normal diversified equity fund. If the sector slumps, you could lose the money you invest. But, if it booms, you could reap massive gains.

So, while you have the potential to reap high returns, you could also lose heavily.

In a diversified equity fund, if one sector fails, the other sectors balance it out. Hence, the risk is much less.

• 6 must-ask questions about tech funds

The performance

Take a look at the performance of the technology funds, many of which were launched at a time when technology stocks were quoting at phenomenally high prices.

You should not compare the returns of Prudential ICICI Technology Fund with just any other equity fund. How to compare mutual funds should give you a good idea as to how you must compare returns between funds.

Since it is tech sector fund, you can only compare its performance with other tech sector funds.

Now, if you follow this parameter, Pru ICICI Technology Fund has actually not performed all that badly as compared to its peers.

Out of the category of seven funds, this fund has been ranked second consistently on the basis of returns over a six month, one year and three year period.

In fact, in the last three years, the fund has delivered annualised returns of 34.05%.

Therefore, it would be inappropriate to say the fund has not been able to grow. 

The risk

Perhaps, what is worrying you is the fact that the fund is quite volatile.

This fund has the highest standard deviation in the category.

Standard deviation is a measure of how much the actual performance of a fund deviates from the average performance of the funds in a sector over a period of time. Since standard deviation is a measure of risk, a low standard deviation is good.

How risky is your mutual fund will give you an understanding of risks and returns.

This particular fund's high standard deviation is primarily due to the fact that it invests heavily in mid- and small-cap stocks. These stocks have the potential to give great returns but are also very risky. Why mid-caps are hot should be able to throw more light on this subject.

Simply put, this fund is aggressive but it rewards its investors for the risk they take. You have not been able to make a profit from this fund because you invested in it at a time after which the technology sector hit one of the worst patches in the history of the Indian equity market.  

We don't think investing more money in the fund simply to average out your per unit price was a good idea. More investments in a tech fund should follow only if you are bullish about the technology sector and are willing to digest the wild swings that can happen in any sector fund.

Want to sell your units?

Keep the following things in mind before deciding whether or not to exit the fund:

i. Your outlook on the technology sector: Are you bullish on this sector? Do you want to continue to invest in it?

ii. Your total exposure to the technology sector (investments in other mutual funds, investments in tech stocks): If you have also invested in a normal diversified equity fund, take a look at its portfolio. Fund managers invest a fair amount in technology stocks.

If you find that a very high proportion of your total investments is in technology, then you might consider re-balancing your portfolio to reduce the amount of investment you have in the tech sector. 

iii. Tax considerations if you sell your units now: The best mutual fund scheme for you will tell you the tax implications of various mutual fund schemes.

iv. The level of anxiety that the volatility of a sector fund can cause: If you find this fund giving you sleepless nights, you should sell the units and take whatever you get.

As far as your future investments are concerned, investing in a sector-specific fund makes no sense if you are not sure about a particular sector.

It is always better to invest in a diversified equity fund and let the fund manager decide which sectors and which companies to invest in. 

Got a question for Value Research? Please write to us!

Note: Questions may be edited for brevity. Due to the tremendous response, all queries will not be answered.

Disclaimer: While efforts have been made to ensure the accuracy of the information provided in the content, rediff.com or the author shall not be held responsible for any loss caused to any person whatsoever who accesses or uses or is supplied with the content (consisting of articles and information).

Illustration: Dominic Xavier