TCS, Infosys, Wipro down by 20 to 45 per cent from peak: Is it time to invest in new IT Index Fund and ETF?

In the past year, IT stocks have not seen much fireworks. But, the Nifty 50 has galloped 20 per cent in the same period and has hit new highs. The Nifty IT index is still quite away from its highs hit in January 2022. Against this backdrop, fund-houses have brought a new Nifty IT Index Fund and an Exchange Traded Fund (ETF). DSP Nifty IT ETF closes on July 3, while Axis Nifty IT Index Fund closes on July 11. Should you invest? Here is a lowdown.

About the underlying index

The 10-stock Nifty IT index provides investors and market intermediaries with an appropriate benchmark that captures the performance of the IT segment of the market in India.

The Nifty IT index, rebalanced semi-annually, captures the movements of Tata Consultancy Services, Infosys, Wipro, HCL Technologies, Tech Mahindra, LTIMindtree, Persistent Systems, Coforge, MphasiS and L&T Technology Services.

Though this is a 10-stock basket on paper, two stocks viz, TCS and Infosys, account for over 50 per cent weight in the index. And five stocks have over 78 per cent weight, making the index a very concentrated play, i.e. a few stocks of gold sway over the index movement.

The Nifty IT index is a sectoral stock basket. Irrespective of an index fund or ETF route to play this sector, entry/exit timing becomes very important since there is no diversification. Hardly do stocks of any sector behave differently from the overall sector mood.

While the Nifty 50 is in a buoyant mood and has hit new highs, the Nifty IT index (28,800 levels) is about 24 per cent away from its Jan-2022 highs (38,100 levels). After the strong rise in tech spending in the Covid era and even post-Covid, listed Indian IT firms (mainly export-oriented IT service players) have witnessed investors sing a tune of caution as valuations surged. This led to some top IT stocks having seen correction in the last one year (see table), though they are up 15-30 per cent (CAGR) on a 3-year basis, a period which started after the Covid market crash phase.

IT sector fortunes

Information Technology (IT) industry has played a major role in the Indian economy. While the sector is important from a long-term perspective, short-term market participants are searching for answers in a few areas.

First, there is concern about the timing of the anticipated pick-up in discretionary spending by enterprise customers amid fears of a much-expected US recession.

Second, FY24 guidance/consensus downgrades have occurred, and it is unclear  if the pain is over for IT stocks.

Third, the continued strong employment and high and sticky core inflation data indicate that US interest rates will at least remain elevated (if not higher) for a longer period than expected. There are worries that industry growth would be ‘slower for longer’, risking the sharp revenue growth pick-up built in for FY25.

While it is understandable if investors today feel, the relatively lengthy time-wise correction in the Nifty IT index induces a FOMO feeling, especially as other sectors run up. But if a sustainable pick-up in fundamentals is some time away, then current Price to Earnings (PE) multiples are not cheap either. Also, investors need to remember that just as Nifty IT has given positive alpha, the index has also produced negative alpha in many instances (see table).

About the new index fund, ETF

DSP Nifty IT ETF is an open-ended exchange-traded fund (ETF) replicating/tracking the Nifty IT index. To hold ETF units, you will need a demat account. ETF entry/exit can be done on the stock exchange platform. ETFs allow investors to take benefit of intraday movements in the market, which is not possible with open-ended funds.

Axis Nifty IT Index Fund is an open-ended index fund tracking the NIFTY IT TRI. The minimum investment will be ₹5,000 and in multiples of Re. 1/- thereof. If redeemed or switched out within seven days from the date of allotment, there will be a 0.25 per cent exit load.

Existing Nifty IT ETFs sport an expense ratio of 20-22 basis points, while index funds cost 35 basis points.

Actively-managed IT funds (direct plan) have expense ratios of 37-100 basis points. Here is how active IT funds have performed (see table). Active funds have performed better than passive products based on the IT index.

Our take

Sectoral index fund/ETF bets historically show higher volatility and drawdowns than diversified equity funds. This is also true to some extent for actively-managed sectoral funds.

bl.portfolio IT sector house view is that challenges are yet to be navigated for the IT sector, so this is not yet a time to buy aggressively. Since IT stocks are still trading above-average valuations, lumpsum investments are best avoided when a slowdown is yet to hit.

However, MF investors with high-risk appetite may start a 5-year SIP in IT stocks/index if they can stomach volatility and if higher sectoral exposure fits within their financial plan framework. ICICI Prudential Technology fund has a slightly broader mandate and can be considered for your SIPs.

(with inputs from Hari Viswanath)