The technology sector seems to have revived its mojo with the Nifty IT index advancing on a bullish note. Shares of some technology companies are now among the top gainers in the stock market, thus, explaining how the IT sector has not lost its relevance since 2022 when it raced down to the bottom of the market due to price corrections.
Personal financial analysts now claim that some overpriced shares have corrected sharply to their fair prices. Investors have now resorted to “Buy on Dips”, which explains why many of the IT stock prices have risen far above their 52-week lows.
With the IT sector again gaining acknowledgement and traction among investors, many fund houses are coming up with new fund offers (NFOs) in this sector. Take, for example, the recently launched Axis Nifty IT Index Fund launched by Axis Mutual Fund on June 27, 2023.
The fund offer would be in vogue till July 11, 2023. The newly launched fund is essentially an index fund that seeks to track returns by investing in a basket of Nifty IT TRI stocks and aims to achieve returns of the stated index, subject to tracking error.
This is evident from the scheme’s proposed asset allocation as given below.
Instruments | Indicative allocations (% of total assets) | Risk Profile | |
Minimum | Maximum | ||
Securities covered by Nifty IT TRI | 95% | 100% | Very High |
Debt & Money Market Instruments | 0% | 5% | Low to Moderate |
The motive is to benefit from long-term wealth creation by staying invested in this kind of fund for the next 10-20 years. This is an index fund, thus, implying that this would be a passively managed fund, thus, hinting at zero interference from the fund manager.
Within index funds, investors have the option to invest in certain Sector Based Index Funds as well, to capitalize on the growth opportunity provided in that particular sector.
The primary goal of an index fund is to mirror a stock market index through its portfolio. It includes all the stocks listed in the index, ensuring that they are represented in the fund’s investment portfolio. This strategy guarantees a performance that closely resembles that of the tracked index.
However, considering this is an NFO, is this worth investing in? One may argue against it by citing that there is no past performance to assess how likely it would grow in the future. But, does past performance matter when it comes to evaluating index funds?
Hiren Thakkar, Chartered Accountant & Proprietor - Hiren S Thakkar & Associates said, “In my opinion, investors need to check past performance over a period of five to 10 years (and not the short-term performance) to judge the performance and whether that index fund suits its risk appetite. As there are many index funds including factor investing funds like momentum, quality, low volatility etc.”
You will find some of the world’s best investment experts like John Bogle echoing in favour of index funds. His famous quote, “Don't look for the needle in the haystack. Just buy the haystack!” resonates well with investors who ensure to have at least one index fund in their investment portfolios.
Though this is an index fund, the allocation continues to be in one sector alone. We cannot deny that it is also a kind of thematic fund. This implies this NFO combines the attributes of being both an index fund and a sectoral fund. Index fund investors will have the choice to invest in sector-based index funds, which allow them to take advantage of the growth potential offered by specific sectors.
The recently launched Axis Nifty IT Index Fund combines the attributes of both an index fund and a sectoral fund. However, it is a new fund offer. Should investors refrain from it or consider allocating a part of their earnings into this fund regularly?
Basavaraj Tonagatti, a certified financial planner (CFP), SEBI-registered investment adviser and a finance blogger at BasuNivesh explained, “There are presently only 10 stocks in the Nifty IT Index. Again, among these 10 equities, Infosys and TCS have the biggest exposure (almost 50%). The remaining 50 per cent is among the other eight stocks. The five equities that constitute the Nifty IT index are already included in the Nifty 50 structure, where the IT sector accounts for roughly 13 per cent of the total. Therefore, I strongly advise staying away from such a heavily focused Index. Instead, indirectly owning a Nifty 50 index will give you a well-diversified exposure of about 78 per cent to the top five holdings in the Nifty IT index.”
Investing in mutual funds has helped many create wealth in the long run, but knowing where to invest and when to exit matters. Not that all are averse to putting money in NFOs; however, putting money in funds based on past performance and other parameters helps gauge how well we invest our money for better earnings in the future.
As said by the famous investor Warren Buffett, “Never depend on a single income, make an investment to create a second source”. However, that investment must be well thought out, which means that you must take time to learn why you are investing and then decide where you are investing.
Don’t just invest for the sake of investing. Invest with sound knowledge and confidence in where your money is going.
