Investing in sector funds is usually for a relatively sophisticated investor who has a core holding in diversified funds. Technology was the best performing sector in 2006-07 and there is a wide choice of stocks available for investment across a range of market cap and area of operations. If an investor is considering investments in information technology (IT) and software stocks through mutual funds, Magnum IT Fund from the stable of SBI Mutual Funds is worth a look. Launched in 1999, Magnum IT is a part of Magnum Sector Funds Umbrella, and as the name suggests it belongs to the genre of sector funds that can invest primarily in tech stocks, with minimum exposure to debt.

Since its inception Magnum IT has performed outstandingly well and has provided handsome returns over the long as well as short term horizon. The fund holds top position among its peers and also has beaten the benchmark index, BSE IT by a wide margin. It has posted annualized returns of 45.04%, 54.57% and 33.68% over the last one, three and five years respectively in comparison with the benchmark index, BSE IT which has given returns of 20.40%, 41.70% and 24.32%. In the near term as well the fund has shown returns of 31.12% for last 6 months as against 11.51% delivered by benchmark index.

Since past performance is no guarantee for future returns, the obvious thing to check is the prospects for the sector as a whole. Speaking to myiris, Sanjay Sinha, Fund Manager, SBI Mutual Fund said, “IT in India has a great future and there is place for all the players to grow. In the generic IT space the trend is very clear that large is becoming larger and that is likely to continue. However, in the niche applications, it's these mid tier companies that would continue to dominate and grow aggressively. Thus we see a very good future for both these set of players not only in coming one year but for years to come.”

The fund while picking up stocks follows a blend of growth and value-buying strategy with a focus on few large-caps and niche mid-caps players. When queried about funds stock picking approach and investment strategy, Sanjay Sinha said that the approach in the fund is largely bottom up and to that extent stock specific. The strategy is two pronged; first playing on the macro IT theme, the fund would hold a few large cap leaders in the fund. Second, in the mid cap space the approach is to select only those companies that have some specific niche in their area of operation. The overall idea is to have stability in the fund from large cap plays and an aggressive growth push from the mid cap niche players.

Further commenting on funds focus on mid-caps he said, “The entire mid cap space in our portfolio is occupied by niche players in their respective area of operation. We have negligible exposure to mid cap generic players. I think barring unforeseen circumstances, we would continue with this strategy.”

Some of the fund’s favourite stocks over the last year include Infotech Enterprises, Infosys Technologies, KPIT Cummins Infosystems, 3 I Infotech, Subex Azure (formerly Subex Systems) and Tulip IT Services. It takes long term view before investing in stocks, so it is not that aggressive in churning portfolio. The number of stocks held in the portfolio has been fairly static at 20, an increase of three stocks compared with the year-ago period. The top 5 stocks account for about 46.56%, while the top 10 stocks accounts for about 65.69% of the total portfolio. Besides IT, the fund has also invested in a few other sectors such as pharma, consumer goods, services and telecom, which presently accounts for 17.75% of the total portfolio size. The asset under management (AUM) of the fund has grown to Rs 102.02 crore, up 63.51% over last one year. However, its cash component has gradually increased from 5.99% in Sep.06 to 22.41% in Feb.07. When asked about this, the fund manager said that the reasons for higher cash levels are due to fresh inflows and pending deployment of funds.

It is often said that one should aware of the potential upside and also prepare for downside before investing in sector specific funds. Technology funds are no exception, but the growth opportunities and the macro factors continue to remain attractive over the medium term. These funds can even prove to be counter cyclical with the overall market as a slowdown in economic growth in the US can push more software work offshore. Of course, an appreciation of the rupee and higher taxes are dangers which can eat into company profitability.