After a prolonged period of underperformance starting in January 2022, the information technology (IT) sector is back in fashion among fund managers. Several asset management companies (AMCs), including Bandhan Mutual Fund, HDFC Mutual Fund, Axis Mutual Fund, and Quant Mutual Fund, have recently launched Nifty IT index funds or technology-focussed funds, per updates from the mutual fund industry.
While most growth stocks had a downturn in sentiment in 2022 as a result of the global central banks starting a cycle of rate hikes, technology stocks in particular experienced a severe decline. Consequently, the Nifty IT index tumbled 15 per cent since January 2022, despite an 11 per cent recovery since the beginning of 2023. The benchmark NSE Nifty 50, in comparison, managed to gain around 16 per cent between December 31, 2021 and September 13, 2023. Mirroring the underperformance of the IT index, heavyweights such as Tata Consultancy Services (TCS) and Infosys are down 12 per cent and 23 per cent, respectively, from their all-time high levels, which they touched in January 2022.
“With the rising interest rates not having a dramatic impact on economic activity and tech spending as expected, coupled with the [recent] pause in the interest rate cycle, IT stocks are back in favour with value investors,” says Gopal Kavalireddi, Vice President-Research at discount broking firm FYERS. There are so many listed firms to choose from in the technology sector right now, he adds. So, “opportunities for high returns over the next three to five years are fantastic”.
“Sensing the investor interest, asset management companies (AMCs) are launching technology-related exchange-traded funds (ETFs) and mutual fund schemes,” says Kavalireddi. For instance, DSP Mutual Fund in June launched the DSP Nifty IT ETF, an open-ended exchange traded fund (ETF) replicating the Nifty IT index. Kavalireddi adds that the Indian government has set a goal of making technology and digital economy’s contribution to the economy rise to 20-25 per cent by 2025-26, from an estimated 10 per cent now. “With an expanded and diversified presence across sectors and a GDP target of $5 trillion by FY26, the contribution from the tech sector could reach $1 trillion. This bodes well for investors looking to deploy capital in fresh investment opportunities in the IT and related sectors, from a three- to five-year perspective,” he says.
With total assets under management of over Rs 27,400 crore as of September 13 this year, technology-focussed mutual funds have already consistently delivered robust returns to investors over various periods (See chart Good Showing).
Sirshendu Basu, Head of Products at Bandhan AMC, is also bullish on these funds. “The IT Index’s current valuation is near its long-term average and far below its early 2022 highs. Thus, IT has a good chance of catching up and outperforming over the next three to five years, given its affordable valuation,” he says. The Bandhan Nifty IT index fund’s new fund offer ran from August 18 to 28, 2023.
Despite continued global economic turbulence, worldwide IT spending is projected to increase by 5.5 per cent to a total of $4.6 trillion in 2023 and 7-8 per cent during CY 22-27, according to a forecast by data and analytics company Gartner. “The software segment is expected to see double-digit growth as companies prioritise increased productivity and automation. With increased outsourcing, Indian IT services could grow at high single digits in dollar terms and double digits in rupee [terms],” says Basu.
Ashish Gupta, CIO of Axis AMC, says IT expenses are more resilient now as more companies digitise. “We believe IT index funds can help create value and protect against market downturns. IT underperformed against the overall market during the global financial crisis, taper tantrums and Covid-19, but the rebound was sharper. Moreover, the IT sector has never underperformed the broader market for more than two years in a row,” he says.
Gupta adds that the earnings downgrade for the sector is largely done, “which is also visible in the results of US-based SaaS companies”. A majority of such companies have either maintained or upgraded their guidance midway in CY23 which also bodes well for Indian IT companies in the medium term, he says. “What is also different this time versus previous downturns is that the order book for most IT services companies has remained strong. Valuations continue to be below the three-year average and in line with five-year averages. As and when revenue growth revives, we should see the sector delivering decent returns.” For investors, that is good news indeed.
@iamrahuloberoi