Birla Mutual Fund which manages funds well above Rs 2,000 crore has many firsts to its credit. Birla Advantage fund with a size of around Rs 380 crore has been unique. It has provided 63 per cent annualised returns for the last three years.

Very few can question Shah's strategy of focusing on a few software stocks at a time when the going is good. But Shah himself does not believe in quantity. ``I look at the qualitative aspect,'' he avers. For him, diversification is not necessarily the key to success. ``Investment is not democracy where you give a proportionate and equal representation toeverything. It's a business of picking, choosing and selecting where your conviction is the highest. Risk reduction doesn't come from excessive diversification. It comes from strong knowledge of the business", he adds.

The Rs 250 crore portfolio as of July 30, 1999 shows that 20 per cent of the corpus is in Infosys, 9 per cent in Visual Soft, 8 per cent in Hindustan Lever and 7 per cent in Archies Greeting. But that was as of July 30, 1999.On August 30, 1999, Infosys is 20 per cent, Visualsoft 12.77 per cent and Archies 5.85 per cent. Since the latest portfolio was not available for September, the current position could be different and the assets have grown to around Rs 380 crore.

The fund manager argues that there are nine stocks in a total of 25 stocks with a weight of over five per cent. As far as these three stocks are concerned, the holdings have fallen from 33 per cent to 26 per cent.

The dependence of the NAV on these three stocks is very clear from the fact that the correlation for all thesescrips to the NAV comes very close to 1. For Infosys, the measure works out to 0.97, for Visual Soft it is 0.94 and for Archies it works out to a whopping 0.98. The period taken to derive this statistical measure is from January 1998 to the first week of August 1999. The correlation coefficient is used to determine the relationship between two properties.

Such exposure also means volatility. BAF is relatively more volatile than the Sensex. Shah questions the measure, adding ``volatility is a statistical aspect. Standard deviation does not capture all aspects. It is more important to look at the qualitative aspects, as that is more important.

Fluctuation doesn't mean risk. In fact, volatility is an opportunity. You can have funds that can remain stagnant with no volatility. What matters is the long term ability of the fund manager to generate returns. Would anybody like to have non-volatility without returns?''

But isn't the fund overweight in one sector? ``No, there is adequate diversification. Youmight say that I'm heavily exposed to software. For example, we have NIIT, a leader in education business, VisualSoft is a typical Silicon Valley stock and Infosys is into high quality business of global service. I think I'm comfortably diversified in the sector itself", he argues.

Even now, Shah believes that Infosys is a highly undervalued stock, which tops the holding of the fund since 1995. Infosys has proved doomsayers wrong repeatedly. But what about Archies, which commands a PE of 50 today?

Unbelievable, its discounting is in striking distance of Hindustan Lever which has a PE of 60. Can Archies PE be sustained? Since liquidity is very thin in the scrip, the returns appear notional. Real returns can happen when there is active trading. In any case, most of the institutions and funds in Archies greetings are long-term.

Shah's view of liquidity is different: "I always believe quality dictates the long-term liquidity and not the other way round. If the business is right, liquidity will be there. Webelieve that if the company is right and valuation is reasonable, liquidity will automatically come. This applies very much for Archies.''

In Archies, the fund holds 2,65,400 shares. Archies is a high-quality business run by a competitive management, he argues. ``The company has an ROI of 75 per cent. How many businesses generate that sort of returns! It is a Rs 60 crore business and we expect the performance to be even better.Sales are expected to move up by 20 per cent for several years and the profits will grow faster than that.''

No doubt, unconventional fund management has paid beyond anyone's imagination. But as more investors log in to Birla Advantage and the corpus grows the high-risk-high-return strategy could be a double edged sword.