Technology mutual funds are down by 10% in one month. What should investors do?

IT sector funds, the star category of the last year, is bleeding in the short term. The schemes have lost 10% in one month. Some schemes have fallen by 12% in the last one month. IT sector funds have offered phenomenal returns in the last one year. Experts attribute the fall in the sector to multiple reasons like stretched valuations and a sharp rise in attrition.

The massive rally that happened in the IT sector in 2021 stretched the valuations and a correction was much needed, say analysts. Big IT firms like Infosys, Tech Mahindra and L&T have seen more than 10% fall in share prices in the last two months.

Scheme Name	1-month returns (%)	1-year returns (%)
Franklin India Tech	-7.20	10.71
ABSL Digital India	-8.85	30.15
Tata Digital India	-10.03	33.15
SBI Tech Opp	-10.34	29.53
ICICI Pru Technology	-10.76	34.13

“The sector is going through a correction as the valuations were much higher than its long term average. The recent result season is also seeing some disappointments on both growth and margins. The cost pressures for the next few quarters are likely to be high as expenses like travel, facility expenses, visa cost start normalizing. From the demand perspective, management’s continue to remain optimistic which is also evident in the revenue outlook and the guidance shared. The global IT spend is likely to remain elevated for the next few years as per market research organizations, which adds visibility to Indian IT services companies from a two to three year perspective,” says Meeta Shetty, Senior Analyst & Fund Manager, Tata Mutual Fund.

Shetty also believes that IT sector has given far superior returns over the last two years, which was driven by both valuation re-rating as well as higher than expected growth. She says that going ahead the sector should move purely on growth.

Mutual fund advisors also believe that the current volatility is short-term and the longer term view of the IT sector funds looks promising. “Technology stocks have reacted to the lower than expected results of Infosys and also the general correction in global tech companies. And even though there has been a healthy correction in the past month the 1-year returns are still at 26%. Even the 3-year return is aggregating at nearly 29%. If you have the risk appetite, it is a good time to add funds to this sector. If you are an existing investor, you should stay invested and not get bothered by short-term volatility,” says Juzer Gabajiwala, Director-mutual funds, Ventura Securities, a financial services firm based in Mumbai.