MF Query Board

Readers are requested to send only one query at a time so that more readers get a chance. Have questions relating to any aspect of personal finance. Ask DSIJ at editorial@DSIJ.in and get your queries resolved

I have started a SIP of Rs 5,000 per month in ICICI Prudential Technology Fund – Direct Plan. I wish to know whether it is a good fund to remain invested in. Readers are requested to send only one query at a time so that more readers get a chance. Have questions relating to any aspect of personal finance.
- Nidheesh J

ICICI Prudential Technology Fund is a sectoral fund that invests obviously majority of its assets in information technology (IT) stocks. So, while investing in this fund or any other technology-dedicated fund, you need to remember that you are investing in a concentrated portfolio, thereby increasing the risk of your portfolio. Now let us move on to understand a few things about the ICICI Prudential Technology Fund. The scheme would largely invest in equity and related securities of technology as well as technology dependent-companies. It is benchmarked against S & P BSE Information Technology Total Returns Index (TRI). At the end of the November 2021 the total assets of the funds were invested in 44 stocks.

In order to gauge the performance of the fund we would be running the fund from rolling returns and maximum draw- down tests

The table and graph above show the rolling returns and maximum drawdown as compared to the category average. In terms of rolling returns, it successfully beats the category average. However, in terms of maximum drawdown, it loses the score as maximum number of times it falls more as compared to the category average. The maximum drawdown of ICICI Prudential Technology Fund is 35 per cent, while that of category average is 32 per cent. The Calmar ratio of ICICI Prudential Technology Fund is 0.66, whereas it is 0.63 of the category average. This means that in terms of risk-adjusted returns the fund in question beats the category average by a slight margin.

Having said that, though in terms of rolling returns it is able to beat the category average, it does carry concentration risk. This is because the concentration is in terms of sector allocation as well as stocks allocation. Being a sectoral fund, let us ignore the sector concentration. However, in terms of stocks allocation, the top 10 holdings of the fund form 69 per cent of the assets and the highest allocation to a single stock is 22 per cent which is to Infosys. This means that the fund has higher dependency on the performance of a single stock. Therefore, we would urge you to first understand the risk that you are exposed to while  investing in sectoral funds and then invest in them as it is evident from the maximum drawdown test that historically it has fallen more than 35 per cent and around 15 per cent during the short-term major corrections.

I am new to investing in mutual funds. So I ran through various YouTube videos where most of them recommended investing in index funds specifically in UTI Nifty 50 Index Fund and HDFC Sensex Fund. So, should I invest in the same? Please advise.
-Tejasvi Khurana

As you said, you are new to investing in mutual funds and we assume that you are new to the equity market as well. So, to begin with, let us first understand the process you should follow while investing in mutual funds or any other investment avenue for that matter. Following the process ensures that you are on the right track. First of all, you need to ask yourself the following:
•Why do you wish to invest or what is your objective of investing?
•What is the time horizon for which you are investing?
• What is the amount that you are targeting to achieve at the end of the time horizon as decided in the above point?
• What is your risk profile or risk tolerance level?

Answering the above questions would make it easy for you to select mutual funds. Now coming back to the core of the query, as a beginner we would suggest you to invest in balanced advantage funds. These funds dynamically manage the asset allocation for you. If they find that the market is overvalued, then they would tactically reduce the exposure to equity by investing in debt and vice versa. Hence, compared to an equity mutual fund, these are somewhat less risky as they have debt allocation which helps during volatile times.

When you say UTI Nifty Index Fund or HDFC Index Fund – Sensex Plan, these are index funds. This means that they seek to imitate the underlying index. Therefore, the risk and returns involved would be directly proportional to that of the index. Although, this is one of the best ways for most of the retail investors to have exposure to the equity market, investing only in them would not help you contain the downside risk. Therefore, before you get your hands dirty by having maximum exposure to equities, we advise you to take the balanced advantage fund route. And once you are familiar with the equities and are ready to assume the underlying risk, you can very well invest in these index funds.