Is it outperformance or an underperformance?

NEW DELHI, JANUARY 10: Do the high returns in infotech funds lure you to the fund industry? If yes, think twice. Consider this. Fund manag...

NEW DELHI, JANUARY 10: Do the high returns in infotech funds lure you to the fund industry? If yes, think twice. Consider this. Fund managers are busy tom-toming about the 350 per cent plus annualised returns in their infotech funds, while the average annualised returns in the top few infotech stocks in the past three months stand at a whopping 575 per cent. So, while IT funds may have outperformed market indices, they have clearly underperformed the infotech sector which forms the backbone of their corpus. For our study, we have considered only the Group A and B1 stocks on the Mumbai Stock Exchange; the returns would have been higher had we included the low-cap IT stocks in Group B2.

This means, that the next time you pull out your wallet to invest in an IT fund, it could be worthwhile to take a peek at some of the individual IT stocks, too. The underperformance of the infotech funds is even more glaring if one considers that a portion of their corpus had been invested in IT IPOs like Hughes Software, Polaris Software, Kale Consultant and SQL Star where the returns on listing have been astonishingly high 8211; often in excess of 100-150 per cent.

Of the six dedicated infotech funds at present, the highest return has come from the SBI group8217;s Magnum IT Fund, whose NAV has shot up by 106 per cent to Rs 38.28 as on December 31, 1999. Launched in July 1999, the fund8217;s top three holdings 28 per cent of the total corpus are Mastek, VisualSoft and Infosys. Taken individually, these stocks have given a 3-month return of 198 per cent, 148 per cent and 103 per cent, respectively. Which means, if you had invested in these three stocks instead of the fund, your average 3-month return would have been 150 per cent! Similarly, the Kothari Pioneer Infotech Fund has given a return of 100 per cent in the last three months. The top three holdings of the fund are Mastek Ltd, Satyam Computers and Infosys Tech. which individually have given a 3-month return of 198 per cent, 103 per cent and 96 per cent respectively. The average return in this case works out to 132 per cent. The top three holdings of Kothari Pioneer IT fund comprises 45 per cent of the totalcorpus.

Now, turn to the IT stocks in the secondary market. Even assuming that you could not afford the likes of Infosys, you could still have made a killing. A low-priced Aftek Infosys, for instance, has seen an appreciation of 618 per cent in the last three months. The stock has moved up from Rs 296 on September 30 to Rs 2126 at the close of the century. Orient Information, which was available at less than Rs 100 in September, is now trading at Rs 444.5 8211; giving an annualised return of 1405 per cent. However, this is not to say that you must restrict yourself to the low-priced infotech stocks. With the onset of demat trading, the likes of Infosys and VisualSoft is now within your reach. Buying one share of Infosys or for that matter any good quality, large software company is no problem now.

And, if the valuations of the infotech stocks in the secondary market still daunt you, remember that the party in these counters is yet to begin. The technical correction is now almost over and with the Nasdaq index bouncing back, the fortunes of the IT sector are sure to look up soon. Besides, with the third-quarter results likely to be declared soon industry major Infosys is likely to come up with yet another sterling performance with a net profit of Rs 70-80 crore, the uptrend in IT stocks is but a foregone conclusion. Of course, with the sector looking up, the net asset value of the IT funds will also go up. But as before, the sectoral returns will be much higher.