What is Core & Satellite strategy?

In recent months, several mutual fund companies have launched tech funds that are  betting on the country’s IT sector.

Recently, HDFC Technology Fund was launched  as an open-ended equity scheme fund. It will invest in technology companies. Bandhan Mutual Fund had recently launched the Bandhan Nifty IT Index Fund… Investors were also given the opportunity to invest in Axis Nifty IT Index Fund and DSP Nifty IT ETF… These funds are placing bets on the growth of the country’s Information Technology, i.e., IT sector, primarily tracking the Nifty IT index.

This is the situation when the one-year return of IT sector mutual funds is just around 5%, while during the same period, multi-cap funds have provided returns of about 18%. The performance of IT shares has also been sluggish recently… In such a scenario, the question arises, why are mutual funds placing bets on this sector when the performance of IT shares is lackluster?

Most IT funds invest in listed IT companies in India. The IT sector is considered to lead global innovation. If we look at the long term, investors in the Nifty IT Index have received an annual return of around 17% over the last 10 years. This is significantly better compared to other sectors.

These funds allocate 80% of their assets to companies in the IT sector. Experts say that these days the IT sector is experiencing a correction, and due to this, the valuation of IT shares has become quite attractive over the past year or two… During the COVID period, interest rates were low, and the performance of the tech sector was quite good. However, in the high interest rate environment, IT shares have stumbled, especially for tech companies facing losses.

Going ahead, rate hikes may end globally. Similarly, tech companies have secure medium-term growth drivers. However, any headwinds in the form of recession can be negative for these companies.

So, should one invest in the  IT funds?

Nitin Rao, Product Head at Epsilon Money Mart, said that the Indian IT sector has consistently performed well in the long term. Recent underperformance has led to a significant drop in share valuations. Consequently, shares of financially strong companies are available at lower prices. Investing in NFOs carries more risk, as there’s no data on past performance. Predicting the future becomes challenging. If an NFO comes with a new idea and an investor is willing to take more risk, they can consider investing in it.

The management of several Indian IT companies is better. They have good corporate governance. Considering the growth in earnings, the long-term track record is good. Over the past decade, the IT sector has outperformed the Nifty 50 Index. So, the current weakness in IT shares could be taken advantage of by investing in IT funds. This way, one can benefit from their growth potential in the future.

According to a research report by Axis Securities, due to the economic slowdown and weak macroeconomic outlook, there are challenges ahead for the Indian IT industry in the near future. However, its long-term outlook remains strong. There is hope for a recovery starting from the second half of the current fiscal year.

In this scenario, investors who aim for wealth creation in the long term and want to benefit from investing in equities or equity-related instruments related to IT can consider investing in them.
However, these are sectoral funds. Therefore, investors need to be mindful that they come with a comparatively higher level of risk. While these funds may offer high returns, those who can tolerate higher risks are the ones who should invest in them.