Best IT Sector Mutual Funds – Top Sectoral Technology Funds to Invest in
The rise in demand for IT services
Even before the Covid-19 pandemic, the demand for IT services was rising. But, during the Covid-19 pandemic and the resulting lockdowns, the demand for IT services went through the roof. All across the globe, people were confined to their homes due to lockdowns. As a result, they were working from home, shopping from home, and availing of all other goods and services from home. All this was made possible due to the digital services provided by IT companies. This blog will focus on the best IT sector mutual funds.
What are IT sector funds?
An IT sector MF is an open-ended equity scheme primarily investing in shares of listed IT companies. The minimum investment in equity and equity-related instruments of the IT sector companies is 80% of the total scheme assets.
So, an IT sector fund will invest in shares of IT companies such as TCS, Infosys, HCL Tech, Wipro, etc. The IT companies may be from the large, mid, or small-cap companies.
Advantages of investing in IT sector funds
- As per the quarterly financial results of most IT companies, the demand scenario for IT services is very robust. Most IT companies are bagging big multi-year transformation deals. Their future order pipelines are at all-time highs. They are recruiting new employees heavily to service the existing and new projects.
- After many years, IT companies are reporting double-digit growth in revenue and profits. They are giving good guidance for future growth in revenue and profits. The other benefit of investing in IT companies is that most of them are debt-free. They have huge cash on their balance sheets. They pay dividends regularly and do share buybacks from time to time.
Top IT sector mutual funds
Some of the best IT sector mutual funds include the following.
| Scheme name | AUM (Rs. crores) | 1-year | 3-years | 5-years |
| Tata Digital India Fund | 5,583 | 12.48% | 30.33% | 29.14% |
| ICICI Prudential Technology Fund | 8,477 | 13.99% | 33.49% | 27.55% |
| Aditya Birla Sun Life Digital India Fund | 3,160 | 8.24% | 31.00% | 26.79% |
| SBI Technology Opportunities Fund | 2,432 | 13.71% | 28.02% | 24.86% |
| Franklin India Technology Fund | 710.88 | -0.49% | 22.11% | 19.59% |
(Source: https://www.moneycontrol.com/mutual-funds/performance-tracker/returns/sectoralthematic.html)
Note: The returns are as of 29th May 2022. The returns are for direct plans with growth option. The one-year returns are absolute. The three and five-year returns are CAGR. The funds have been ranked based on five-year performance.
As seen in the above table, the five best mutual funds in IT sector have given returns in the range of 19.59% to 29.14% CAGR. These are very good returns. While the returns from IT sector funds have been good in the last five years, it may be difficult for them to repeat the same performance in the next five years.
Investors may have to lower their future return expectations from IT sector mutual funds. Investors may start a SIP rather than investing a lumpsum amount in IT sector mutual funds. A regular SIP will average the investor's purchase price in the long run and even out the market volatility.
Who should invest in IT sector based mutual funds?
While the IT sector mutual funds have done well in the past, investors should note that any sectoral fund has concentration risk. Any sector fund invests a minimum of 80% of its total money in the shares of companies in that sector. So, investors with an aggressive risk profile may invest in IT sector mutual funds. Ideally, the IT sector funds should not be more than 10% of the overall investment portfolio.
An investor should follow the core and satellite investment portfolio model. IT sector funds and other sectoral funds can be a part of the satellite portfolio. You can invest in an IT sector fund when the demand for digital services is high. We saw this during the Covid-19 pandemic. The demand for digital services went up during this period. As a result, IT companies providing these digital services got huge orders from various clients. It resulted in higher revenues and profits for these companies. As the share prices of IT companies went up, the NAVs of IT sector funds went up, thus resulting in good profits for investors in IT sector mutual funds.
Risks associated with IT sector funds
Most Indian IT companies depend on their US clients. They derive a major share of their revenue and profits from their US clients. With the end of easy monetary policy in the US and the rise in interest rates, economic growth is expected to slow down in the US. Some economists expect the US economy to go into recession either in the latter part of 2022 or early 2023.
If there is a recession in the US, it will impact the major companies in the US. If these companies cut their IT budgets, it will impact the Indian IT companies. It will lead to lower revenue and lower profits for Indian IT companies.
Historically the IT sector has done well in India
In the last many years, IT companies have done well in India. The cost of providing IT services from India is lower than the major economies such as the US, Europe, Japan, etc. As a result, Indian IT companies enjoy the cost advantage and have done well in the past. They are expected to continue to do well in the future also, although the growth rates may be lower. Hence, you may allocate a small part of your investment portfolio to IT sector mutual funds and expect decent returns from it.
To start investing in mutual funds as per your appropriate asset allocation, download the Glide Invest App from Google Play Store or Apple App Store and get started.