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Uncertainties ahead

Kothari Pioneer AMC is launching the first Internet fund -- Internet Opportunities Fund. This will be the second IT sub sector closely following the blockbuster -- Kothari Pioneer Infotech Fund, the first Indian infotech fund. The fund aims to capitalise on the dramatic growth of the Internet and its profound impact on personal lifestyles and the conduct of business and commerce the world over.

The fund will charge an initial expense of 2 per cent implying a starting net asset value (NAV) of Rs 9.8 for your investment of Rs 10. The fund offers growth and dividend plan besides 54EA and 54EB plan. Investors also have the choice of systematic investment and systematic withdrawal plans.

While the Infotech Fund invest primarily in software services and product companies and to some extent on companies with computer training revenues, the Internet Fund will singularly focus on dot.com and Internet companies, Internet Service Providers and Portals; convergence plays on media, telecom and internet; infrastructure and hardware providers; software companies focusing on Internet and e-commerce applications and lastly businesses leveraging the internet for strategic advantage. Besides, the fund would be investing in the overseas listed ADRs/GDRs of Indian companies and a maximum of 20 per cent of the net assets would be invested in unlisted securities.

AMC Track Record
Kothari Pioneer is a pioneer, with a positioning on three Ps-product (innovation), place (service) and performance (superior returns). It is the first private sector fund to start operations in December 1993. Today, it manages 20 schemes with assets of Rs 1,400 crore. While it has the widest range of growth, income and money market funds, it's a market-leader in equity schemes. With seven equity schemes - three diversified equity schemes, three sector schemes and a tax planning scheme - it has an asset base of Rs 855 crore, the highest among the open-ended equity fund families.

Taking advantage of the tax-exemptions given to open-end equity schemes in the 1999 Budget, Kothari Pioneer has doled out a series of hefty dividends in most of its equity schemes. The Infotech Fund is the star performer; its NAV has shot up by 400 per cent to Rs 51.42 within 15 months of its launch. Of course, a strong investor orientation - it is the only AMC with an in-house investor service infrastructure - has helped. Like many other funds, Kothari Pioneer suffered in a falling market (post-1994) as many of its diversified equity schemes (Prima, Prima Plus and Bluechip Fund) were saddled with illiquid stocks. But it was one of the first to restructure its portfolio. As a result, the last three years have been fruitful for the AMC with good performance figures. With a wide reach, superior service, and strong performances, the fund is well-placed to consolidate its position in the mutual funds mart.

Scheme	Type	Aim	Lanuch	Total Return*	3 year returns**	NAV***
KP Bluechip	Open-end	Equity - Diversified	12/01/1993	35.91	70.14	52.47
KP Prima	Open-end	Equity - Diversified	12/01/1993	24.22	50.38	35.84
KP Prima Plus	Open-end	Equity - Diversified	09/29/1994	24.72	66.37	30.59
KP Taxshield '95	Closed-end	Equity - Tax Planning	04/01/1995	33.25	70.31	37.70
KP Taxshield '96	Closed-end	Equity - Tax Planning	04/01/1996	43.61	50.96	37.67
KP Taxshield '97	Closed-end	Equity - Tax Planning	04/01/1997	72.32	-	43.98
KP Taxshield 98	Closed-end	Equity - Tax Planning	04/01/1998	125.77	-	41.91
KP Taxshield 99	Closed-end	Equity - Tax Planning	04/01/1999	312.54	-	30.72
KP Taxplan	Open-end	Equity - Tax Planning	04/11/1999	261.89	-	27.43
KP FMCG Fund	Open-end	Equity - Sector/Speciality	04/01/1999	70.50	-	15.15
KP Infotech	Open-end	Equity - Sector/Speciality	08/23/1998	315.41	-	37.76
KP Pharma Fund	Open-end	Equity - Sector/Speciality	04/01/1999	50.90	-	13.68
KP Income Builder (G)	Open-end	Medium-term debt	06/24/1997	13.97	-	14.06

* Annualised total return since launch ** Annualised total return since 24/12/96 ***NAV as on 31/01/2000

Investment Case
KP Internet Opportunities Fund would be the first of its kind adding to the many firsts that the AMC already has in its roster. Though the fund has become the talk of the town, it is more for its incomprehensible nature than for the merits or demerits. Nevertheless, it would be a mistake if the fund is seen in the same garb as the Infotech Fund for there is more than a subtle difference between the two.

Almost all the technology stocks have entered a parabolic rise. It shows the tremendous tug that technology in general has provided on the imaginations of investors. Billions of dollars of market value have been created through IPOs for an industry that did not exist in 1990. Millions of new investors have been created who desire a part of the dot.com riches. Whether these hopes will be realised is yet to be determined. Secondly, the parabolic rise reflects the absolute crushing of value investing relative to growth. These are the companies with the highest P/E multiples with little earnings.

However, of all the technology stocks, Internet stocks are different. They have no history and no consistency. For example, Hindustan Lever (HLL) is an age-old company that has been increasing its profit at a rapid pace annually for many years. HLL is currently earning Rs 41 a share. If growth continues at 15 percent annually, then it will earn Rs. 220 in 2010, all the while providing a nice dividend. If HLL's stock doubles to Rs 5120 a share by then, it will be trading at a price-to-earnings (P/E) ratio of 23. You can play with any of these numbers, but the point is HLL has a history and a consistency, and whether the right growth estimate is 12 percent or 18 percent, you know the broad territory.

As far as Internet Stocks are concerned, one school of thought is that buyers of Internet stocks will continue to make money as long as they convince the next guy that the stock will be worth more tomorrow than it was yesterday. Certainly, the Greater Fool Theory operates in the Internet market. The other belief is that investors will bid up Internet shares not because they think they can dump them someday on someone even more foolish than they. They think that Internet companies will score big earnings, which justify big prices. This is not an outlandish belief.

Nevertheless, the Internet companies do have huge potential. And its possible in that in year 2025 we'll look back on this period in the way we now look back at the Industrial Revolution. The recent indiaworld.com deal of Rs 500 crore in cash for a company that doesn't earn any money but attracts a few million eyeballs is an example. But it being a sector where change and the velocity of change becomes the buzzword, profits should only be a near future event. Besides, the basic premise of the e-commerce sector is low-cost delivery. Take Amazon.com, which created a revolution in the book business, then expanded into audio tapes/compact discs, videotapes and electronic greeting cards, bought a stake in Drugstore.com and started running auctions too. And every quarter Amazon.com reports a higher sales and losses to add a few billion dollar in capitalisation.

However, a greater challenge lies in their rightful evaluation. The rapid growth of these new companies has challenged the conventional valuation models used to decide whether a stock is cheap or expensive. Besides, we just don't have the pure Internet stocks. We have Internet plays - companies which will leverage Internet. And the few Internet companies we have like Satyam Infoway and rediff.com don't have any earnings yet -- a fact that makes projecting their future earnings very difficult. As a result there might be a relatively longer gestation period before the high potential of the sector gets translated into befitting figures.

Yet, there is no denying that Internet is for real and will become the greatest revenue-generating machine in economic history. But one has to wait for the real Internet companies to emerge, while the infrastructure - computer usage, backbone, bandwidth and connectivity evolves. And on this count perhaps Internet Opportunities Fund looks a bit ahead of time. For this and its uncertainties, don't bet your shirt on Internet stocks. Buy them more for love than for reason. For better or worse, deep analysis won't help.

Kothari Pioneer Internet Opportunities Fund
Price: Rs 10 per unit
Initial expense: 2 per cent
Minimum investment: Rs 10,000, further in multiples of Rs 1,000
Opens on: January 31, 2000
Closes on: February 21, 2000

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