IT funds log in high returns amid US tech stocks' free fall

When US tech stocks are falling like a pack of cards following Meta's disappointing earnings report which triggered a decline of 25 percent in its share price, it is vital to look at how IT funds in India performed in past one year ending December 2021.

Certain sectors are conventionally insular to the unanticipated occurrences such as pandemic. Barring healthcare and pharmaceuticals, there are a few sectors that performed well during the spread of Covid-19. Regardless of massive disruptions at workplaces, industries and job creations, the sector that continued to march ahead with resilience and gusto is IT.

Funds that invested in information technology sector grew for more than a year. When compared to the BSE Sensex return of nearly 19 percent in past one year, technology benchmarks — BSE Teck and BSE IT — have outperformed by posting 47% and 54% percent respectively, in 2021. 

Even Indian tech benchmark indices have outperformed the US benchmarks including Nasdaq100 and Nasdaq Composite which returned around 8 percent and 2 percent respectively until Dec 2021.

Leading the rally

When you closely look at the portfolio of these companies, it would be clear that they managed to outperform largely due to an inclination towards small and mid-cap IT firms. 

Although the IT sector outperformed over other sectoral indices, the mid-caps performed better over the IT giants such as TCS, HCL and Wipro. 

Another factor that distinguishes the top performing fund from an average performing one is the right kind of international exposure. 

The funds which performed well chose the right international stocks. For instance, ICICI Pru performed best despite 9 percent international exposure and SBITOF with 23 percent exposure did better in comparison to Franklin that has 27 percent exposure.

This is how IT funds performed

                                                                       Source: ACE MF (as on December 2021)

Although the stock prices of IT companies have reached high, it is believed that their valuations have outpaced growth of earnings, leaving scope of market correction in the near or medium-term future.