Is it time to bet on technology or IT funds? (2024)

The IT sector or the technology funds are showing signs of a comeback. After riding high during the covid years, these schemes have been under pressure for the last one year on concerns of global growth, higher rates, IT budget cuts, among others. Can you hope to get better returns from your IT funds in the coming months?

Technology funds offered around 2.73% returns in the first one week of February, according to ACE MF data. These schemes have been up by around 7% in the last one month and around 6% in the last three months. Though these schemes were 3% up in six months, they have lost around 10% in the last one year.

“The recent quarter performance of Indian IT companies was relatively better, especially on the deal-win numbers. Unlike expectations of some caution by clients and slowdown in deal-wins, so far the deal-wins have held up well, giving some visibility for growth. This has led to some optimism in the sector. On valuations too the sector is off from its peak of around 34x to 24x one year forward PE, which gives some comfort,” says Meeta Shetty, fund manager, Tata Mutual Fund.

Vaibhav Dusad, fund manager, ICICI Prudential Technology Fund, says the current uptick is due to temporary sector rotation.“Investors are switching out of banks and reinvesting in technology. The technology sector has underperformed by 25-30% in CY22 while banking has outperformed and hence the rotation,” he says. Read the full interview: ‘Good time to enter IT sector from 2-4 year perspective’

The shares of big IT firms like Infosys, TCS, and HCL technologies rose by around 1-3% in the first one-week of the month. The Nifty IT - TRI index has offered around 2.84% during the same period. So, the apprehensions about the global recession, steep rate hikes, big IT spending cuts and so on have vanished?

The IT sector saw sharp correction in CY22 due to concerns on spending cuts by the large global enterprises, in the backdrop of macro challenges in the developed economies, says Meeta Setty. In a recessionary environment there is a high likelihood of rationalization in cost. “While the concerns still remain and the clarity on budget cuts will emerge in the coming months, structural levers like increasing intensity of outsourcing Cloud adoption (which is still only around 25-30% of total IT workload and can move to over 50% in next 3-4 years, as per Indian IT companies), the need to keep improving on customer experience, increasing need of cyber security, data, and analytics are long term positives for the sector. The sector’s financials too are strong with good balance sheet strength, decent free cash flow yields, higher payout to shareholders and higher ROEs,” says Shetty.

Vaibhav Dusad says the global macroeconomic environment continues to be unclear due to issues with inflation in the US and EU markets. “In 2024, this might have an effect on the big corporations' technological budgets. However, we think that this effect would probably only last a short time and would become apparent in 1HFY24.”

Dusad says the IT sector demand is dependent on the economic conditions in the US and EU markets. “We expect some moderation in technology budgets in CY23 and not a sharp pullback. The current rally in India IT is also partly driven by the relief seen in Nasdaq in view of the possibility of a soft landing in the US and the peak of Fed rate hike behind us,” he says.

Meeta Shetty says that although the intensity to spend on tech may remain high vs the pre pandemic years, she expects the intensity of growth to moderate from the mid double-digits to a more reasonable level. “The Indian IT sector remains a structural play on global digitisation and investors with a long term investment horizon may take a systematic approach to invest in the sector.”

So, what should investors do?
“Given that post-Covid returns from the Tech sector till end of 2022 have been very high, investors need to temper their expectations accordingly and remain invested from a 2-4 year perspective. Investing systematically through SIPs over this course may prove to be fruitful,” says Dusad. He says it is a good time to enter into the IT sector from a two to four year perspective. “The sector could remain volatile in the near term and it is advisable to invest through SIPs and do a lump sum if one sees decent correction in the sector.”

Source:ACE MF, Returns as on February 10 2023