scorecardresearchIT mutual funds: Cautious outlook but vital for portfolio, say experts

IT mutual funds: Cautious outlook but vital for portfolio, say experts

Updated: 21 Jul 2023, 02:38 PM IST
TL;DR.

Amid benchmark indices hitting all-time highs, IT stocks are not performing as well. We explain whether investors should bet on IT funds in a bid to earn higher gains in the near future

Different fund houses offer different stock composition within the IT theme

Different fund houses offer different stock composition within the IT theme

With Infosys witnessing a sharp decline of up to 10 percent in its share price on Friday following the company’s lower-than-expected Q1 net profit, investing in this tech stock, and IT sector in general, does not appear too upbeat.

So, does this mean the IT sector is staring at a dark alley ahead ? Well, we try to peel the layers off this question, and look for some specific answers.

Investors who want to get exposure to the IT sector, while investing in mutual funds can do so by investing in one or more sectoral mutual funds focussing on IT.

According to the Sebi’s categorisation of mutual funds, sectoral funds are the ones that invest a minimum of 80 percent in the stocks of a particular sector or theme.

This means an IT fund is meant to have a minimum or 80 percent of investment in the stocks of IT or IT services firms such as TCS, Infosys, HCL Tech and Tech Mahindra.

Future in IT: A good buy?

Experts and analysts do not have an optimistic view on IT funds, particularly in the immediate future in the backdrop of higher costs after the pandemic and recent unfolding of global events including slowdown in the US and technical recession in Europe.

Chokkalingam G, Founder of Equinomics Research, says he has a neutral stand on IT stocks on account of technical recession in Europe and growth slowdown in the US. 

“In the recent past, employee costs have also risen in the IT sector. Therefore, IT services growth, in dollar terms, is expected to be lower than 5 percent,” he says.

“You can look at them from a defensive viewpoint as they will provide cushion in case the market falls, but if the market continues to rally, IT stocks would underperform,” he adds.

Siddharth Alok - AVP & Investment Councilor, Epsilon Money Mart believes that the past 2 years were not particularly good for large cap IT stocks and the status quo could sustain for another few quarters. However, these stocks offer good buying opportunity, he believes.

“IT and consumption are known for their evergreen performance. But if you look at the past two-year return, the tech stocks especially the large caps haven't given any returns. Talking about the results, some of them have given somewhat decent, but the pain can last for another few quarters,” he says.

“If we compare the data with that of NASDAQ, the IT index indeed looks poised for generating good compounding returns in a few years. Thus, they are giving a good entering opportunity. However, investors must know their risk appetite & goals before entering into them as returns will not be linear,” he adds.

Long term future

There is another school of thought according to which, a theme such as IT must be seen in totality and also be seen from a long-term perspective. It also suggests that one theme ought to be seen in conjunction with other sectoral themes such as pharma, banking and FMCG.

“Technology should not be seen as a standalone sector but a vital part of the portfolio. One can look at all five key sectors such as pharma, banking, FMCG, auto and IT while creating a well-rounded portfolio since all of them are important. Also, IT theme can have several sub components, for example, Mirae Asset has artificial intelligence (AI) as a theme, which is different from what other tech funds offer such as the one by Franklin India,” Sridevi Ganesh, a Sebi-registered investment advisor says.

“So, one should examine the constituent stocks of the IT fund and see if it aligns with your financial goals. And importantly, one should look at it in the long-term perspective instead of taking a call based on an IT giant's poor quarterly results,” she adds.

Some of the popular IT sectoral funds in India

IT mutual funds 1-year returns (%)AUM ( crore)
ABSL Digital India Fund18.683,823
Frankling India Technology Fund21.39858
ICICI Prudential Technology Fund 12.6711,037
SBI Technology Opportunities Fund18.893,160
Tata Digital India Fund13.577,768

(Source: AMFI)

Some experts, however, advise retail investors to exercise caution when it comes to investing in sectoral funds.

“Investors should ideally avoid sectoral fund exposure, and instead opt for Flexicap funds where fund managers have a mandate to move across sectors and stocks rather than making this decision themselves. In case they do want to buy to take sectoral exposure, they need to remember that the allocation should not exceed 5 percent of their portfolio, and they should ideally enter through a SIP/STP taking a long-term view on the sector,” says Vishal Dhawan, CEO and Founder of Plan Ahead Wealth Advisors.

 

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Index funds are mutual funds that replicate the portfolio of an entire index like Nifty50. 
First Published: 21 Jul 2023, 02:38 PM IST