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IT sector funds are down but not out. How safe is it to invest in tech stocks?

Indian IT stocks were riding on the global positive sentiment, and though things changed earlier in 2022 on fears of a recession in the key US market, the sector has a long growth path and valuations are reasonable compared to six months ago, but be aware of the risks.

August 24, 2022 / 10:18 AM IST
Representative Image

Representative Image

The information technology (IT) sector has turned out to be one of the worst affected by the recent volatility in the stock market. In CY2022, technology sector funds as a category have lost 22.78 percent, compared to a 1.31 percent loss reported by flexicap funds, as per Value Research. The sector was the darling of many investors last year. Does the recent fall call for a look at these funds?

Valuations matter

The IT sector houses some of the best names in corporate India. Many of these companies have good balance sheets and healthy earnings growth. They are seen as cash-generating machines. However, valuations surged dramatically when investors the world over started chasing tech stocks in the aftermath of the COVID-19 pandemic. Work from home meant that software and hardware technology that enabled remote access and communication from anywhere at any time were in high demand, as were companies that enabled this. The Nifty IT Index quoted at a price to earnings multiple at 39.58 times on January 4, 2022.

Indian IT stocks were riding on the global positive sentiment. But things changed earlier in 2022.