Technology mutual funds weather IT storm as diversification pays off

Active tech funds down only 5.8% in one year even as IT index plummets 17%

Most technology mutual fund (MF) schemes managed to largely mitigate investor losses amid the rout in information technology (IT) stocks over the one-year period ending March 2.

 

Active technology funds are down 5.8 per cent on an average in the one-year period, while the Nifty IT index slid almost 17 per cent.

 

The active schemes, according to experts, benefitted from their diversified nature. New-age companies, apart from digital firms and IT, form the core of these schemes. 

The reason behind the wide variance in the performance of technology funds and IT indices is evident from the composition of the Nifty India Digital index, which is a wider representation of the technology sector in India. Six of the 10 largest holdings of the index — Eternal, Bharti Airtel, PB Fintech, Info Edge (India), One97 Communications and Swiggy — are non-IT firms. 

The index's performance, which is down about 3.5 per cent in the last one year, has been similar to that of active technology funds. 

Fund managers attribute the relative resilience of technology funds to their diversified portfolios. 

"Our scheme (Invesco India Technology Fund) invests in IT services and businesses where technology is the underlying theme, such as consumer tech, fintech, industrial tech, hardware, and telecom. The fund invests in companies which have a long runway for growth, driven by their early and adequate investments in technology. This is largely a growth-biased fund with around a 25 per cent value composition," said Hiten Jain, Fund manager at Invesco MF.

 

Some funds like Edelweiss Technology Fund also benefitted from their international exposure.

 

"Our global portfolio positioning proved to be a significant driver of outperformance for the technology fund. Over the past two years, we maintained a strategic 20–30 per cent overweight in US technology, aligning with the build-up of the artificial intelligence (AI) technology cycle. This allowed us to effectively capture the surge in AI-related spending across US tech majors. We simultaneously managed the transition within Indian IT in a disciplined and timely manner," said Trideep Bhattacharya, president and chief information officer (CIO), Equities, Edelweiss MF. 

With the correction having eased valuations, IT stocks may see a rise in their weights in technology funds.

 

“We may raise IT exposure based on attractive valuations on relative terms. However, the overall fund strategy remains unchanged even in the current scenario," Jain said. 

Indian IT stocks have been under pressure amid concerns that rapid advances in AI Could disrupt the sector’s traditional, people-intensive business model.

 

The uncertainty around discretionary tech spending by global clients has further dampened sentiment, dragging IT stocks lower over the past year. 

"It is now clear that AI would start impacting lower-end tech jobs such as coding almost immediately. However, this activity is now a small part of the total work that Indian IT performs.

 

The most plausible scenario is that the clients may request larger discounts than usual. Indian IT services may respond, potentially using AI tools themselves. It could result in reduced effort being put. While some benefit may be passed on, margins could move in a narrow band. Higher discounts may temporarily affect the revenue growth trajectory,” Motilal Oswal AMC stated in its latest outlook.