DSP MF rolls out tech sector ETF after dismal year for IT stocks. Time to scoop up IT stocks?

Mutual Funds

DSP Mutual Fund (DSP MF) has announced the launch of a new fund offer (NFO) -- DSP Nifty IT ETF (DSPNI). It is a passively managed scheme. So, the fund manager of DSPNI will aim to track the Nifty IT index. The launch comes at a time when shares of information technology (IT) companies are going through a volatile phase, despite having handsomely rewarded investors in the long term.

"The Indian IT sector has been a consistent performer in the long term, thanks to the global competitiveness and edge that they possess, which also bodes well for the foreseeable future. Investors looking to benefit from this long-term growth story may consider investing in the Nifty IT index, which is interestingly poised after underperforming in the recent past," said Anil Ghelani, Head – Passive Investments & Products, DSP Mutual Fund. He is of the opinion that at current levels, valuations are approaching average multiples, and many companies in this sector appear financially healthier and cheaper compared to their global IT peers.

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Over the last year ended June 23, 2023, Nifty IT index has delivered 4.81 percent returns, compared to 21.78 percent returns by the Nifty 50 index.

Shares of IT companies performed well, thanks to the use of technology shooting up multifold following the COVID-19 pandemic. The demand for tech services went up sharply, and investors started offering higher valuations to these companies. However, in CY2022, interest rates were hiked to tame rising inflation, and the days of easy money came to an end. That pulled down the valuations enjoyed by equities, especially for loss-making companies in the tech sector. Expectations of a recession on account of rising interest rates, in general, pulled down equities and, in particular, tech stocks, which were enjoying high valuations.

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"Corporate spending on information technology is expected to come down in a recessionary environment. This may affect the fortunes of IT companies in the short term," says Ashish Ranawade, Head- Products, Emkay Wealth Management.

Invest in technology

The current volatility, however, can be used to one’s advantage by smart investors. Some experts are of the opinion that this can be a good time to scoop up shares of IT companies that score high on corporate governance and return ratios and have healthy balance sheets. Given the complex businesses these companies are into, many investors may find it difficult to choose individual stocks for their portfolios, and hence they would be better off taking the mutual fund route.

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There are 15 existing technology sector funds managing assets worth Rs 24,415 crore, out of which 10 are passively managed index funds. Also, many diversified funds invest in shares of technology companies. For example, flexi-cap funds invested an average 9.59 percent of their money in technology names.

The use of technology in our lives is highly unlikely to go down from here. The disruption induced by changes in technology has changed the way businesses are conducted. That means more corporates are likely to invest in technology. Many new-age tech-enabled businesses may turn profitable over a period of time.

Ranawade sees an opportunity in investing in the IT index at lower levels. "Investors should accumulate at lower levels over the next six to nine months," he adds.

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Investors keen on avoiding fund manager risk and keeping their costs low may find the index fund route attractive. However, there are proponents of actively managed funds as well.

Ravi Kumar TV, founder of Bengaluru-based Gaining Ground Investment Services, says, "The complexity of technology-backed businesses is going up. Services companies, which enjoy high weights in Nifty IT index, may not be the only wealth creators going forward. Investors are better off investing in actively managed technology sector funds."

Fund managers of actively managed equity funds also invest in shares of tech-enabled companies listed in India as well as global heavyweights listed in the USA. This strategy can not only help to diversify across businesses and geographies but also ensure that fund managers reduce the weight of individual stocks, which are typically on the higher side in any sector index fund.

The NFO of DSP Nifty IT ETF closes on July 3, 2023.