Technology sector has always lured funds of all hues across sectors.
And they have reasons for the liking. Technology stocks have always been on the forefront, growing organically and inorganically at a rapid speed. No wonder then that the technology funds have been beating the benchmark BSE IT index consistently from 2002 onwards. However, 2004 was the only year when technology funds generated less (23 per cent) returns compared with benchmark's 26 per cent return.
The quarterly numbers of the top technology companies show that they are driving up strong growth in volumes. For example TCS posted a net profit of Rs 1,104.7 crore in the third quarter of 2006-07, a rise of over 11 per cent over previous quarter. The company's bottom line surged 8.4 per cent to Rs 4,860 crore in the third quarter.
Another technology giant, Infosys Technologies, reported a net profit of Rs 983 crore in third quarter, a 5.8 per cent rise over previous quarter. The company posted higher revenues at Rs 3,655 crore during the same period. Similarly Satyam Computers also posted robust numbers (Rs 337 crore profit on a turnover of Rs 1,670 crore in third quarter). This is not to say that the robustness is confided to large companies only. Several mid caps and small caps in this space like NIIT Technologies, Sasken Communications, KPIT Cummins, Hexaware etc are also reaping profits. The net additions of 38,300 employees by the top four players of the Indian technology sector in the first half of the current financial year viz. TCS, Infosys, Wipro and Satyam reiterates its robustness.
Though concerns have been raised over a possible 'slowdown' in the US economy, Indian IT companies are not expecting any cuts in IT spending by their foreign clients. They rather say that as a measure of cost-cutting, more work will be outsourced to Indian companies. However, it will be a matter of time which will determine billing rates for Indian companies. Another positive for the growth in the technology sector is growth in business from European countries. Margins from these countries are higher and this growth will help the sector to offset the pressure on margins due to the appreciation of rupee.
Image Makeover
Since the dotcom burst of 2000, technology companies have come of age and scripted a fabulous turn around. In fact, they are now regarded as long-term wealth creators rather than speculative. No wonder then that companies like Infosys, Tata Consultancy Services, Wipro and Satyam etc are regarded as stocks-for-all-seasons. However, there have been quite a few new technology companies that have emerged on the scene and funds have taken a liking to them. Companies like Infotech Enterprises, HOV Services, Tech Mahindra, Mastek, Tanla Solutions, Sasken, Info Edge, Nucleus Software Exports, Educomp are the companies which have started gaining prominence in the portfolios.
Maintains Figure
The technology category's five-year annualised 31 per cent return (till March 9, 2007) was more than that of the benchmark BSE IT index (22.57 per cent). Now consider short-term figures. The Sensex fell 11.38 per cent during the one month period ending March 9, 2007. Compared to this, the BSE IT index restricted its loss to 9.22 per cent. During the same period, the technology category of mutual funds lost 9.12 per cent, less than its benchmark and the Sensex. If we calculate the year-till-date returns (till March 9, 2007) of the technology funds category, then they lost just 1.31 per cent compared with benchmark's 5.66 per cent and Sensex's 6.54 per cent. In fact, the category of technology funds lost the least during this period. PERFORMANCE Fund/ Index Ret (%) 6 mths 1 year 2 year 3 year 5 year BSE IT 13.6 31.4 34.3 39.0 25.7 Birla Sun Life New Millennium 28.1 44.7 46.6 45.5 37.4 DSPML Technology.com 43.2 53.1 51.3 47.1 40.2 Franklin Infotech 15.9 33.8 37.0 39.3 29.9 Kotak Tech 18.7 31.8 30.9 34.1 28.9 Magnum IT 38.5 59.8 59.1 53.5 35.1 Prudential ICICI Technology 39.4 49.6 48.4 43.9 38.0 UTI Software 26.0 43.6 44.6 40.7 29.9 
Returns as on February 28, 2007 Returns up to 1 year are absolute and those above 1 year are annualised
Budget Effect
The Budget has proposed to impose 11.2 per cent minimum alternate tax on companies which were enjoying exemptions under Section 10A and 10B. Though the move hit the technology stocks, some large companies have said they would create a deferred tax asset against which they could set off against future taxes, thus creating minimal impact on reported earnings. Another negative for the IT sector could be the fringe benefit tax (FBT) on ESOPs. FBT would be charged on the difference between the issue price and the exercise price. This would discourage companies, particularly the smaller ones, from offering ESOPs, further making it difficult for them to attract and retain talent.
Favourite Across Funds
If you've been a stock market investor in these last few years, it would have been extremely difficult to give technology stocks a miss. And the same is true for mutual funds as well. Out of the 158 diversified equity funds (whose February 2007 portfolios were available), just seven did not have exposure to technology stocks. Of the remaining 151 funds, a majority 81 have technology as their top holding at the sector level while as many as 106 funds have it among their top three sectors. Things are pretty much the same where tax-planning funds are concerned. Out of the 26 equity linked savings schemes (ELSS), 16 have technology as their top holding.
While this speaks loads about the prospects of Indian IT companies and the kind of conviction fund managers are putting in this sector, it also points towards the fact that you might not need to invest separately in a technology fund. This is because you are likely to have sufficient part of your money already invested in technology stocks, had you been investing in diversified equity and tax-planning funds.
Therefore, it is important for you to take a holistic view of your portfolio before committing to a technology fund. And if you feel that you understand the sector well and are ready to take concentrated exposure to technology stocks, then there are quite a few good funds available to you.