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Tech fund investors' cup of woes runneth over

Aabhas Pandya

The problems of the recently launched technology fund investors are beginning to multiply with net asset values, or NAVs, of all the five funds now quoting below par.

In the case of Prudential and Kothari Pioneer technology funds, the NAVs have been below par for almost a fortnight now. Undoubtedly, it's a good time to go bargain hunting for technology funds but if investors get nervous, fund managers will have a tough time.

Rumours abound that some technology and technology-heavy funds have come under redemption pressure and fund houses concede that they have been inundated with calls from jittery investors.

With the Sensex dropping by a massive 600 points this week (including Thursday morning's fall), investors are now on the brink of pressing the redemption button. On the contrary, funds have been net buyers in equity markets to the tune of Rs 650 million till April 17.

While funds have bought stocks worth Rs 2.59 billion, they have sold stocks of Rs 1.94 billion.

The fall has been more painful for those investors who borrowed money from finance companies to invest in the initial public offerings, or IPOs, for these technology funds.

However, that 'ICE' (information, communications, and entertainment) will melt so rapidly was least anticipated.

Investing by borrowing gathered momentum when Alliance New Millennium rallied from its opening NAV of Rs 15.29 to Rs 18.45 in a matter of just 12 days. The fund generated a startling return of 84.5 per cent in a matter of less than two months! That investors believed the tech funds were only headed northwards is stating the obvious.

The worst hit in this slide has been the fully invested Alliance New Millennium. The fund's NAV has taken a beating from a high of Rs 18.45 to Rs 9.89 - a drop of 46 per cent.

Consider this: On the day the fund's NAV was at its peak, the fund's assets under management were Rs 9.96 billion. The same has now dropped to Rs 5.34 billion. This assumes that there has been no redemption or fresh inflow in the fund.

And though the fund's NAV is only marginally below par (and much better than other technology funds), it could be the worst hit due to the extent of the fall if investors were to panic and start pulling out money.

Among other funds, Kothari Pioneer's Internet Opportunities Fund has dropped to Rs 8.73, while IL&FS e-COM Fund has slipped from its high of Rs 14.58 to Rs 8.14.

Prudential and Sun F&C technology funds are below Rs 8, with Prudential Technology Fund dangerously close to going below Rs 7. The fund's NAV was 7.15 as on April 19.

With the drop in NAV, the combined corpus under management of these funds has shrunk by 15 per cent to Rs 17.46 billion from Rs 20.49 billion, mobilised in IPOs, again assuming that there has been no redemption.

The market is indeed, a great leveler. Technology funds were sold with an aggressive pitch and mobilised astronomical amount by industry standards. However, a few days' fall in indices has wiped out close to Rs 5 billion from the combined corpus.

Again, if investors were to start redeeming, the fund houses are largely to blame for this. These funds were sold like the IPO of a company, promising sharp gains, once the fund went open-ended.

Unfortunately for these funds and their investors, the market has turned the table on technology stocks.

The fall in the market could also precipitate another crisis, albeit of a smaller magnitude. All the technology funds have invested some portion of their corpus in unlisted companies (the Securities and Exchange Board of India, or SEBI, limit is 5 per cent of the assets under management).

Although it's a small portion of the fund's assets under management, the falling market could result in a setback to the IPO plans of these unlisted companies. This will render a part of these funds' corpus illiquid.

Consider this: Alliance New Millennium has invested close to 3 per cent of its assets (as on March 31) or a little over Rs 200 million in 10 companies. Similarly, Prudential-ICICI Technology Fund has put around 2.3 per cent of its corpus in three unlisted companies. The complete portfolio of the other three technology funds is not yet available, but these funds have also bought stakes in unlisted companies.

Second, it is time for truly diversified equity and balanced funds to increase their sales pitch. There are a number of investors, who have found the recent volatility too hot to handle. These funds could expect fresh money to flow in once the market stabilises.

Source: Value Research

Mutual Funds

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