Tech-based MFs outperform benchmarks. But should you remain invested after CLSA's warning?

Notwithstanding CLSA's gloomy 2024 outlook of the IT sector, mutual fund investors with a heart for technology stocks should remain invested in this theme to capitalise on the long-term growth potential, suggest experts.

An ETMarkets analysis of IT theme-based mutual funds shows that these schemes have done well and outperformed their respective benchmarks over 1-year and 3-year periods despite clouds of uncertainty and uninspiring guidance by top IT companies since many quarters.

CLSA's 2024 outlook of the Indian IT sector and downgrades of behemoth Tata Consultancy Services (TCS) along with HCL Technologies set the cat among the pigeons on Tuesday as technology stocks fell on significant selling pressure. The 2024 guidance from global IT service companies does not exude confidence, it said while estimating a further downside risk to FY25 estimates.


Read more: CLSA downgrade of TCS, HCL Tech sparks selloff in IT stocks

IT companies are expected to see improvements from the second half of 2024 with the likelihood of a June rate cut with global inflation trends remaining benign.

“We believe that the outlook of the IT sector will start improving in H2CY24 on the expectations of a gradual demand revival backed by a limited soft recession, easing of monetary policies, exploring new markets and innovative offerings,” Rajesh Sinha Senior Research Analyst at Bonanza Portfolio said.

Tech spending across cloud, IT modernisation, digital customer experience and digital engineering projects along with Gen AI will be the focus area of the IT sector for future growth, he added, recommending investors to remain invested in tech-related thematic mutual funds for long-term growth potential.

Investors focused on the long-term potential may choose to stay invested and ride out the short-term volatility, Adhil Shetty, CEO at Bankbazaar.com said. However, investors averse to risk could choose to book some profits or rebalance their portfolio to reduce their exposure to the sector, Shetty added.

Active schemes

Currently, 9 mutual fund schemes predominantly invest in stocks from the technology sector. Out of this, four schemes viz. Edelweiss Technology Fund-Reg(G), Kotak Technology Fund-Reg(G), HDFC Technology Fund-Reg(G) and Quant Teck Fund-Reg(G) have not completed even one year of launch. The remaining six schemes have outperformed their benchmarks over 1 & 3-year periods.

• Aditya Birla SL Digital India Fund(G) | 1-year returns: 36.09% | 3-year returns: 19.38%
  
• Franklin India Technology Fund(G) | 1-year returns: 55.21% | 3-year returns: 18.58%
  
• ICICI Pru Technology Fund(G) | 1-year returns: 32% | 3-year returns: 18.69%
  
• SBI Technology Opp Fund-Reg(G) | 1-year returns: 27.73% | 3-year returns: 20.34%
  
• Tata Digital India Fund-Reg(G)| 1-year returns: 36.96% | 3-year returns: 20.05%
  

All but one mutual funds are benchmarked against S&P BSE TECk Index - TRI while Tata Digital India Fund-Reg (G) is benchmarked against NIFTY IT - TRI. One-year and three-year period returns by S&P BSE TECk Index - TRI stood at 27.56% and 14.53%, respectively as of March 1, while the latter has given 27.52% and 15.53% returns in the same time frames.

Sectoral funds like those which predominantly invest in IT stocks, deliver in cycles. If someone who has started investing in them but doesn't know the way forward, should opt for diversified funds where sectoral balancing is built into the fund, Shetty said adding that this would take away the difficult decision-making out of the hands of the investor.

Also Read: 1-yr returns by these 10 mid & smallcap mutual funds missed benchmarks by biggest margins

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)