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Birla IT Fund: Sell

S. Vaidya Nathan

BIRLA IT Fund did well last year, turning in attractive returns and outperforming other IT sector-specific funds. The returns of 49 per cent in the last year at a time when tech stocks as well as the broad market took a knock reflect well on the fund's ability to buck the trend. Two factors helped the performance in this period:

— The substantial level of cash held for much of 2001 (at one point, the fund had 50 per cent in cash). This helped it avoid much of the decline in 2001 in IT stocks.

— The focus on stocks such as Digital GlobalSoft, E-Serve, Infotech Enterprises and Mastek, where the fund had sizeable exposures and entered early enough to beat the bull in the early months of 2002.

Business Line had offered a `sell' recommendation on the fund in April 2002, to take advantage of the run-up in IT stock prices, and in July 2001, as the fund's strategies were then highly uncertain, with all equity funds in the Birla Mutual stable taking steep losses in NAV.

Investors can now contemplate booking profits as the scope for appreciation appears limited. Returns of the 49 per cent kind may be hard to replicate. With the spending slowdown on tech still continuing and companies providing indications of modest growth in earnings (of less than 18 per cent), there may be not much room for value gains from the present price levels.

The shuffle in the fund's portfolio also points to profit-booking in many second-rung stocks and a beefing up of exposures in Infosys. This also suggests that the fund has tempered expectations from these stocks and booked profits.

After a difficult period in the meltdown since early 2000, and handling it badly for almost a year, Birla IT Fund appears to have adopted a more cogent strategy now. This makes it an option in the IT sector that could be tracked for entry at lower levels.

Suitability: As with any sector-specific fund, the risks associated with Birla IT Fund are high. But one fund-specific factor that is now absent is the lack of a cogent strategy, which was evident in 2000 and early 2001. Only investors with a preference for high risk should consider such sector funds.

The fund has also, since its repositioning in December 1999, not delivered the kind of returns that could compensate for the risks involved. It has turned in negative returns of around 27 per cent, though it has declined less than benchmark — the S&P CNX IT Index — which shed 32 per cent. Investors who prefer to stay should go for the growth option due to its superior tax efficiency.

Portfolio status: A scrutiny of the portfolio since its re-positioning points to significant changes:

For close to a year, it was almost a two-stock fund, with around 50 per cent of net assets invested in Infosys and VisualSoft. This proved costly during the tech sector meltdown of 2000 and 2001.

Only around mid-2001 did the fund manage to cut these exposures and move into cash in a big way, cushioning its downside in a market heading south.

The fund relies mainly on stocks such as E-Serve, Digital GlobalSoft, Moser Baer and Mphasis BFL, among others, for its good showing. And, unlike in 2000, it has also actively booked profits in these stocks, having learnt lessons from sticking to VisualSoft in 2000.

Now the fund has again pushed Infosys to the top of its charts, though nowhere near the 20 per cent plus weight it had not long ago.

Notably the fund is now steering clear of stocks such as Wipro, Satyam Computer and Hughes Software and has a big exposure in MTNL (telecom).

Fund facts: Birla IT Fund is the rechristened avatar of Apple Platinum Share, which was taken over from Apple Mutual Fund in December 1999. The minimum investment amount is Rs 5,000. There is entry load of 2 per cent and no exit load. The fund has assets of Rs 49.5 crore.

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