High-flying IT funds are taking a breather. Good time to invest?

When Covid hit the world like a sledgehammer, forcing offices to go virtual overnight, savvy investors smelled an opportunity in the IT sector. Their thinking? With everyone working from home, IT companies would be printing money hand over fist. This drove investors to pour their hard-earned cash into IT stocks. Fund houses weren't far behind. They flooded the market with new IT funds, from just 5 before the pandemic to 21 by April 2024.

Investor money gushed in, too, with the total assets rocketing from Rs 1,669 crore in January 2020 to Rs 36,744 crore just four years later.

But as the world returned to normalcy, the IT party came to a halt. A one-two punch in the shape of a slowdown in the US and Europe and India's BFSI and telecom sectors triggered a bloodbath in IT stocks in 2022. (The telecom sector, in particular, contributes a hefty 8-10 per cent to the topline of these tech titans.)

For over two years now, IT stocks have been on a downward spiral. The freefall only got uglier in the last three months, with IT funds bleeding 13 per cent compared to the broader market index's 4.3 per cent gain.

Past performance

However, their long-term performance tells a different story; one that could bring a smile to the face of any patient investor. Time and again, these funds have left the broader market indices eating their dust by outperforming 82 per cent of the time in the last 15 years.

The key reasons behind their stellar long-term performance? The constant evolution of IT services and the global digital transformation wave that has been reshaping businesses worldwide over the last decade. As companies increasingly adopted new technologies to gain an edge, Indian IT companies benefited immensely, raking in substantial moolah as a result.

What are fund managers doing?

Given the contrast between IT funds' stellar past and dismal present, it's intriguing to see how fund managers of diversified funds are navigating this conundrum. After analysing their moves, it appears that when the fall in the IT sector started initially, fund managers were buying the dip. However, the enthusiasm has ebbed. They're neither aggressively buying the dip nor exiting their positions since last year, suggesting they are cautiously optimistic. After all, a two-year drag shouldn't take away anything from the sector's striking long-dated performance.

What you should do

IT funds, like any sectoral fund, are inherently risky. They are prone to extreme peaks and troughs.

Also, trying to time the market and catch the bottom is extremely difficult. Even the best investor in the world will have to second-guess a sector's future movements.

Therefore, it's best to opt for a diversified equity fund. Flexi-cap is one such example. The advantage is that they also invest in IT companies, maintaining a median exposure of 10 per cent. Not just that, their IT exposure has delivered 21.4 per cent returns in the last two years, while dedicated IT funds grew just 4.6 per cent returns.

However, if you still want higher exposure to the IT sector, consider allocating a small portion of your portfolio to IT funds and be willing to stay invested for the long haul.

Also read: Up-and-coming: Is it time to bet on manufacturing funds?