Tech sector funds: Stay invested if you have risk appetite, 7-year horizon

Many Indian information technology (IT) firms rely heavily on the United States (US) for revenue

Technology sector funds have faced significant pressure in recent months. Over the three months ending March 19, they have declined 18.6 per cent on average, the steepest fall among equity funds, according to Value Research.

 

“Near-term uncertainties stemming from muted global growth outlook, tariffs, and geopolitical tensions have impacted the sector,” said Shibani Kurian, senior executive vice president and head of equity research, Kotak Mutual Fund.

 

Weak global cues

 

Many Indian information technology (IT) firms rely heavily on the US for revenue. “The macro environment in the US has clearly deteriorated. Factors like increased uncertainty vis-à-vis US tariffs, cuts in government spending, and reduced probability of rate cuts have delayed the recovery in discretionary spending to the financial year 2025-26. There are also concerns regarding US growth,” said Mahesh Patil, chief investment officer, Aditya Birla Sun Life Asset Management Company (AMC).

 

The Nasdaq 100 index, which has high exposure to technology companies, has been volatile. This has dampened investor sentiment and in turn weighed on Indian tech stocks.

 

AI disruption

 

Indian tech firms are racing to keep pace with advancements in artificial intelligence (AI). “Pick-up of generative AI-led platforms might lead to deflationary risks in the near term. Eventually, we believe generative AI adoption will be a significant revenue driver for Indian IT, but passing on the productivity gains in the initial years will keep overall growth under check,” said Meeta Shetty, fund manager, Tata Mutual Fund.

 

Customers are directing investments elsewhere currently. “In the near term, spending on IT services may be muted due to increased spending on hyperscalers and independent software vendors (ISVs), which are building the infrastructure layer for AI and generative AI services,” added Patil. 

 

Long-term opportunity remains

 

IT firms are adapting to changing business dynamics by investing in emerging technologies and strengthening client relationships. “The structural opportunity in IT services remains intact, especially as more companies move towards AI adoption, which can be a multi-year opportunity,” said Kurian.

 

Shetty adds that valuations are inching towards reasonable levels, following the recent correction.  

 

Be prepared for volatility  

 

Volatility is expected to persist. “The sector may remain volatile in the near term, given the lack of policy certainty in the US and Europe,” said Shetty.

 

Weigh the risks before committing to tech funds. “Discretionary spending has been soft for more than two years now. If a similar environment continues, we may see further cuts in revenue and earnings estimates. A prolonged trade war, softening of US growth outlook, delays in decision-making, and high competitive intensity are risks at the current juncture,” said Patil.

 

Invest for long term

 

Investors with adequate exposure to diversified equity funds should go for sector-specific funds.

 

“Technology has structural potential. Investments in such funds should be made with a long horizon,” said Kurian.

 

Investors must have at least a seven-year horizon. “The recent downturn in the IT sector should be used as an opportunity to buy with a long-term view,” said Atul Shinghal, founder and chief executive officer, Scripbox.

 

Exposure to an individual sector fund should not exceed 5 per cent of the equity portfolio. “Exposure should be minimal due to the sector’s cyclical nature and high risk from single-sector concentration. Investors with a lower risk appetite should avoid sectoral funds,” said Shetty.

 

Shinghal added that new investors should avoid IT funds at this point.