Cash is king for Indian technology funds

Shailendra Bhatnagar

NEW DELHI: Indian technology funds, already hit by a big erosion in net asset

values, now hold a fifth of their assets in cash as they play safe in a volatile

market, figures show.

Some analysts say this cautious stance is depriving investors of better

returns but others say that this is the best strategy for a sector where the

earnings horizon is clouded. Overall 11 technology funds with Rs 8.69 billion

under management hold cash 21.4 per cent of their portfolios, data collected by

fund tracking firm Value Research for the month of October showed.

The cash asset portion of the funds ranged from 6.86 and 64.3 per cent. The

October average cash percentage was marginally higher than the 20.6 per cent

held in cash in September. "A large cash component has resulted in an

opportunity loss and prevented funds from giving higher returns for

October," Dhirendra Kumar, managing director at Value Research, said.

But Deepak Malhotra, a fund manager at Max India, said cash was a safe haven

in the current uncertain environment. "Cash is king in these times when

there is excessive stock price volatility so funds are justified in having a

high cash component as a part of their strategy during those times. It's

protecting investors funds."

There are 12 funds investing in software stocks. Only the figures for UTI

Software fund were unavailable for October as state-run Unit Trust of India (UTI),

the country's largest fund manager, does not disclose its asset profile on a

monthly basis.

Although adjusted net asset values (NAVs) of 12 technology funds surged 10.8

per cent in October over the previous month, they failed to overtake the 12.88

per cent climb by the sector benchmark. Despite the October rise, all 12 NAVs

remain below par. Their average year-to-date return has been a negative 51.8 per

cent. But that is better than the 59.4 per cent dive by the benchmark.

Among the schemes, Pioneer ITI Mutual Fund had a cash component of 9.7 and

17.7 per cent each on assets of Rs 1.86 billion and 1.47 billion respectively as

of October 31. But the fund manager said the numbers were incidental.

Not conscious strategy

"Staying in cash is not a conscious strategy but a byproduct of stocks

shuffling," R Sukumar, fund manager at Pioneer ITI Mutual Fund told

Reuters. Sukumar said his strategy was to remain fully invested, leaving some

5.0 per cent in money market instruments and cash to meet sudden redemptions.

When asked whether a higher cash component capped near term returns, Sukumar

said, "Investors should not take a short-term view on tech funds. They are

meant for taking relatively higher levels of risk over a period of time."

One fund manager who spoke on the condition of anonymity, said the

substantial cash component also mirrored the paucity of good investment

opportunities in the tech sector, which has suffered huge declines in the wake

of the dot-com bubble burst. Another reason could be the 10 per cent individual

stock-specific cap the market watchdog has put in place for mutual funds, which

stops them from taking large positions in leading tech stocks, he said.

He said fund managers preferred the safety of cash rather than investing in

second-tier software stocks. "The earnings visibility continues to be poor

for the sector even though the sentiment has improved compared with

September," the unnamed fund manager said.

Leading technology companies posted better-than-expected results for the

three months to September against a backdrop of a sharply slowing economy in the

United States, their main market which accounts for 60 per cent of India's

software exports.