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IT Sector Mutual Funds invest in stocks of companies belonging to the technology businesses. such as computer software and hardware makers, companies that provide electronics and technological services, such as information technology.
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Technology mutual funds or IT Sector mutual funds invest in stocks of technology businesses to generate long-term gains. These are a type of equity mutual funds that invest in companies dealing in the technological sector, such as computer software and hardware makers, companies that provide electronics and technological services, such as information technology.
For a long time, India’s IT sector has been a key driver of the country’s economy. Some IT sector mutual funds have achieved outstanding returns in recent years and have the potential to continue to do so in the future.
IT sector funds try to place bets on emerging technologies that have the potential to disrupt the tech sector with new advancements. The majority of the companies in these funds work to solve tough business problems using ground-breaking technological advancements such as Artificial intelligence, machine learning, data analytics, IT, digital transformation, etc.
Following are the key advantages of investing in IT sector mutual funds:
IT Sector mutual funds heavily invest across the technology sector. Therefore, these mutual funds are high risk funds. If you are considering investing in technology funds, then you should keep a close eye on the funds’ performance. A thorough understanding of the technology sector and its potential market is necessary. In other words, IT funds are best suit investors who can closely monitor the performance of the market’s IT stocks, as the funds are entirely reliant on them.
Furthermore, since IT sector mutual funds belong to the equity category, you need to have a long-term investment horizon. Equity funds are highly volatile in the short term, and therefore, a long-term investment approach may generate significant returns.
If the IT sector witnesses a downturn, the mutual fund portfolio’s stocks will also decline, with nothing to cushion the blow. Therefore, only experienced and well-aware investors should invest in IT sector funds. Furthermore, even if you are well-versed in the business, sector, and dynamics, a portfolio exposure of more than 10% is not recommended.
Though the Indian technology sector may look promising, you should be careful while choosing a scheme to invest in. Following are some parameters that will help you select the best IT sector mutual fund for investment:
Technology is the path forward and the primary change agent in today’s economic setup. This sector is receiving unprecedented attention due to the government’s main effort towards a ‘Digital India’ and ‘Innovation Promotion’. The technology sector accounts for eight out of ten start-ups in India. India’s IT industry is booming, thanks to plenty of promising opportunities. Emerging technologies such as Cloud services, Fintech, E-commerce, Artificial Intelligence, Virtual Reality, Metaverse, and Blockchain technology offer opportunities for Indian IT companies.
The historical performance of an IT fund doesn’t guarantee future returns. However, analyzing the fund’s returns against its benchmark and peers will help you understand its performance. Funds that have consistently outperformed their benchmark and peers are good investment options. Furthermore, analyzing historical returns will help you understand the fund manager’s performance and the fund’s performance across different market cycles.
IT sector mutual funds focus on taking advantage of the technology industry’s long-term growth potential to build long-term wealth. The fund manager selects stocks based on a company’s history, management, development potential, and overall industry status. Efforts are made to keep the fund’s portfolio diverse to minimise risk. Therefore, look for funds with good diversification.
IT sector funds are equity schemes and therefore require a long-term investment duration to generate significant returns. Consider investing in an IT sector fund only if you have a long-term investment horizon and understanding of the sector dynamics. Equity schemes, especially sectoral, are highly volatile in the short term.
IT sector mutual funds are ideal for aggressive investors who have a good understanding of the technology industry. If you want to diversify your overall portfolio and stay invested for a long period, these funds are worth considering. However, keeping your investments below 10% across sector mutual funds is advisable.
Since IT funds are sector funds, their portfolio has high exposure to stocks from the technology industry, making it a high-risk investment. IT funds heavily invest across the tech giants. This gives high exposure to a single stock. IT behemoths like Infosys and TCS have exhibited excellent profit growth and are expected to continue doing so even in the near future. However, not all IT and related companies may be well-positioned to profit from India’s tech boom. Therefore, you should be aware that some firms may report lesser growth, which might influence their stock prices.
Even though the IT industry is performing well right now, its growth may not be permanent. Markets move in cycles, and so do the industries. Therefore, if you are an investor who understands the technology sector in-depth and is willing to undertake the volatility, you can consider investing in IT sector mutual funds.
The Indian IT sector contributes around 7.7% to the country’s GDP and is expected to contribute 10% by 2025. By 2025, the Indian software product sector is anticipated to be worth USD 100 billion. With a valuation of USD 168 billion, India is the world’s third-largest Unicorn Hub.
India is the world’s popular outsourcing destination for Information Technology firms. The Indian IT-BPM industry amounts to 55% of the global outsourcing market. After demonstrating its ability to deliver both on-shore and off-shore services to global clients, evolving technologies now open up a whole new world of possibilities for India’s top IT companies.
Leading Indian IT companies such as Infosys, Wipro, TCS, and Tech Mahindra are expanding their products and demonstrating cutting-edge ideas like blockchain and artificial intelligence to clients through innovation hubs and R&D centres.
India is quickly emerging as a “Digital Skills” hotspot. India’s IT industry is the largest employer in the private sector. Furthermore, India is among the popular destinations for setting up Global Capability Centres (GCCs). India is home to 50% of all GCCs and employs over 1 million people.
Furthermore, Indian software companies are concentrating their efforts on overseas investments to grow their global presence and improve their global delivery centres.
Indian IT services are known for their cost-effective proposition. The services are 3-4 times more cost-effective than in the US. This gives India a competitive edge in the global sourcing market.
Despite the Covid lockdown, the IT and BPM industries were among the first to adapt to the remote work culture.
Up to 100%, FDI is allowed in software development and computer consultancy services, business and management consultancy services, data processing, market research services, software supply services, technical testing and analysis services, under automatic route.
Source: NASSCOM and Press Information Bureau (PIB)