Why invest in Infotech?
Information technology has become a necessity for each and every company today, in order to leverage the internet for cutting costs, improving productivity and interacting better with the customers.

The all-pervasive nature of technology combined with the vast untapped potential is a pointer to the assured growth rate in the future. Even though there have been a spate of profit warnings by IT majors and slowdown in the US economy, a number of brick and mortar companies across the globe continue to spend hefty amounts on IT, in order to gain competitive advantage. Even if these companies attempt to cut cost, it will only lead to increased business for Indian software service majors, given their cost competitiveness.

Risks involved
Where speed is the essence of growth, obsolescence is a natural fallout. This also explains the incomprehensible nature of the technology sector, where fast-paced innovations, tongue-twisting jargon and vanishing companies are the order of the day.

Thus, it becomes important to adopt a cautious approach and investors can follow certain basic tenets while investing in a technology fund. Here are some of the risks associated with infotech stocks.

Low quality stocks: Despite the fact that Infotech is a great story, the run-up on the bourses through 1999 left a number of investors impoverished and only a handful of them with windfalls gains. The blind chase for sky-high returns saw many pouring their based on some wild tip of a "hot" infotech company. No wonder, the bigger fool theory also worked in the mad IT rush.

However, the ensuing meltdown separated the wheat from the chaff, giving the lower rung stocks a serious battering. A wide variety of technology stocks are available today. And the old stock investment philosophy remains valid for them.

The emerging tech stocks hold a significantly higher gain potential but with greater uncertainty against established companies. So, you have to carefully choose, giving a detailed look to the fund's portfolio.

Fund manager: The fund manager is important for any managed fund. But managing a technology fund needs special skills and interest - tracking fast changing technologies, evaluating business models and more importantly valuing stocks in a rapidly paced market environment. With technology getting obsolete every other day, past track record of companies may not always be a good indicator of future performance.

Global phenomenon: The good performance of the Indian companies notwithstanding, the price discovery is going to be more often than not, disturbed by the global sentiment. The increased number of Indian companies opting for the ADR/GDR route has only strengthened the bonding between Indian and global markets. Thus, if Nasdaq sneezes, Indian technology companies catch cold!

How to invest in Infotech
While Infotech funds deserve a share of your investments, the decision solely rests on you. If you cannot stomach volatility, simply stay away for when you aim for higher returns, you must have the staying power to handle short-term gyrations. For a sample of volatility consider this. During 2000, KP Infotech rose more than 2 per cent on 31 occasions and declined more than 2 per cent on 38 days.

It is important not to invest in stocks directly, but take the mutual fund route, as fund managers are better equipped to manage the portfolio for you.While you may be convinced that Infotech should be a part of your portfolio, there are an umpteen number of funds to choose to fit your risk-return band.

At the top of the pyramid are the likes of Kothari Pioneer Infotech and UTI Software that are dedicated to the IT sector. If you are looking for a reasonably diversified yet tech-heavy portfolio, you have funds like ING Growth Portfolio and Birla Advantage (Infotech allocation in the range of 60-70 per cent). The third category includes funds like Kothari Pioneer Bluechip or Zurich India Top 200 with around 30 per cent investments in Infotech stocks.

While it is important to play a long innings with Infotech funds, a disciplined method would be to invest regularly. A systematic investment plan (SIP) facilitates investments at periodical intervals without bothering about timing the market.

For example, had you made a one-time investment of Rs 60,000 in KP Infotech in January at Rs 77.98, you would currently own 1538.8561 units (including 1:1 bonus issue in January), valued at Rs 35,301. On the other hand, a SIP of Rs 5000 would have fetched you 1889.525 units every month, with your investment worth Rs 43,346. This translates into a whopping difference of Rs 8044.