Tech fall: IT mutual funds disappointed investors big time in fiscal 23; what should you do now?

There is an old saying that says, ‘whatever goes up must come down’. This dictum usually turns true in the context of financial markets and mutual funds. The IT stocks, and therefore, IT funds that witnessed a bull run during the pandemic have seen a considerable decline in the past one year.

In the financial year 2022-23, Nifty IT index declined by a whopping 21 percent while Nifty50 traded flat during the same period, shows the NSE data.

Further, the IT index has dropped 27.41 percent from a record high of 39,446.70. Four blue-chip IT stocks, including bellwether Infosys, Wipro, TCS, and Tech Mahindra fell between 5-40 percent during the same period.

No wonder then the blue-chip sector of the stock market turned out to be the biggest underperformer among all thematic funds in the financial year 2023. As the chart below clearly shows, IT mutual funds dropped in value between 10 to 18 percent in one year.

(Source: AMFI; regular returns as on March 31, 2023)

Why the fall?

Experts attribute the decline to a host of factors which include worries overglobal recession, central banks raising rates, supply chain challenges, earnings pressure from commodity, wage inflation, among others.

Chokkalingam G, Founder, Equinomics Research and Advisor, in Mumbai attributes the fall in IT stocks to steep rise in employee costs followed by attrition that adversely impacted financial performance of IT firms.

Further, the fall of small banks and recession fears have added to the nervousness. “Consequently, most large IT stocks have fallen anywhere from 35% to as much as 50% from their respective 2-year highs,” he says.

The market became uncertain due to the worst performance of tech mutual funds, causing customers and corporations to become more cautious with their spending. Also, the recent US and Europe banking sector issues have made matters worse for IT companies.

Chartered Accountant Nitesh G Buddhadev, Founder, Nimit Consultancy, says “During Pandemic time, there were great returns in IT and pharma and right after that, the returns started to drop. Typically, what happens is that, when there is an unparalleled run, it will average out in the long run.”

What are IT funds?

Information technology (IT) mutual funds invest in companies involved in the production of technology related products, services, or research & development. They are an attractive option for investors looking for growth in a fast-moving sector.

Technology is often seen as a high-risk, high-reward sector, and technology mutual funds can offer a way to diversify risk and access the opportunities of the sector without having to pick individual stocks.

Who should invest?

Technology funds are ideal for investors who have a higher-than-average risk tolerance and are willing to accept a greater potential for short-term losses in exchange for the chance to benefit from long-term technology-related gains.

Although sectoral funds are best for investors who have lots of patience and those who reliably know why they want to take a concentrated bet in a given sector, these funds may also be suitable for investors who want to diversify their portfolios and gain exposure to the technology sector.

“Most investors are better off not investing in sectoral funds at all,” says Dev Ashish, a Sebi-registered investment advisor and Founder of Stable Investor.

“Occasionally, people who invest in sectoral funds, do so as they are looking to generate returns higher than market returns by concentrating their bets on one sector. It’s not wrong. It just comes with additional risks. So, while this worked well in 2020 and 2021 for IT, it backfired badly in 2022 and that is how it happens when you take sectoral bets,” he added.

CA Buddhadev also says that small investors should not take sector calls since these funds are not meant for everyone. “Since these funds invest only in one sector, they are meant to be volatile. Risk adjusted returns are not favourable in the long run,” he says.

The road ahead

Experts believe that IT funds have already bottomed out and hence the only way forward for them is likely to be upward.

Chokkalingam sounds optimistic about IT funds in the medium term to long term future. He says that IT funds would bottom out soon by falling maximum up to 5 percent before they rise again.

“Concern on employee cost is receding as attrition rate has come down significantly and also supply-demand balance is in favour of industry. Though there is fear of possible recession, surprisingly no global institution has predicted any absolute dip in the GDP at world level or for major economies such as the US and China,” he says.

Dev Ashish, at the same time, opines that it is hard to say whether the sector has already bottomed out.

“While the Indian IT businesses continue to remain cost-competitive and that is expected to remain the case for next few years as well. For IT investors, a lot of patience is the need of the hour before headwinds are replaced by tailwinds to take the sector back to its highs of 2021,” he adds.

Before deciding to invest in the IT funds, it is imperative for investors to consider their investment goals and make sure that their risk appetite is high and can accommodate high volatility which these funds carry.

It is also advisable to examine whether the fund fits into your overall investment portfolio and whether it provides adequate diversification.