Analyzing IT Sector funds and their recent performances


Whenever the equity markets are on the rise, schemes of a particular fund house are outperforming its peers or when a particular mutual fund scheme or a particular sector is generating extra ordinary returns, a very unique set of investors flock the equity markets.


Their uniqueness is in reference to their belief that the equity markets will always be on the rise, a sentiment contrary to empirical evidence since the beginning of the equity markets.


It is very easy and simplistic to refer to them as optimists when in reality, greed is the trait in play.


sector mutual funds

What is a Sectoral Mutual Fund?

A Sectoral Mutual Fund as the name suggests invests only in one particular sector.


It is less diversified than a Thematic Mutual Fund since it is restricted to just one particular sector.


   Think of Sports as a theme and various disciplines like Football and Basketball like sectors. Sports constitute both Football and Basketball but Football does not constitute Basketball and Basketball does not constitute Football.


In the same manner a Thematic Mutual Fund constitute various sectors but it is not necessary that various sectors fall within the same theme.


Think of a Pharma mutual fund scheme, it can only invest in companies belonging to the pharmaceutical sector.


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The Background

Prior to the market crash of 2020, the IT sector as a whole was underperforming for several years now.


This changed post the market crash 2020.

The sector had renewed hope with IT services in demand with most work shifting to online mode.

This meant more work for the sector but at reduced costs which in turn meant higher profits.

The sector all of a sudden was staring at a turnaround which was reflected in the quarterly numbers as well as their stock prices.

Investors lured by the recent outperformance poured in IT sector funds at a healthy rate both in 2020 as well as 2021.


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Reality Sinks in  

Both in 2020 as well as in 2021, IT sector funds as a whole generated more than 50% returns.

So far in 2022, the IT sector is generating negative returns.

This has led to the obvious, investors redeeming a good chunk of their investment in IT sector funds and some even at a loss.

The entire cycle lasted for around 2 years, a negligible time period when it comes to equity investing.


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The Cause-Effect loop

Any sector will go through various cycles periodically, the IT sector is no different.

When things were buoyant, IT companies were posting healthy numbers.

Things changed in the first half of 2022 due to the Ukraine-Russia conflict along with stricter Covid related restrictions in China.

Both these factors led to higher inflation rate globally with the US for example having its highest inflation rate for around 40 years.

Equity markets do not take a liking for uncertainty.

The US is the major source for Indian software companies but the US itself is going through a major inflation crisis which in turn has affected sales.

The IT sector which was hiring at a healthy rate post the first lockdown is now being plagued by higher attrition rates and lower job openings.


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Post Mortem  

First time investors motivated by greed during a buoyant market phase usually are also the first to exit during a market correction, the reasons are self-explanatory.

For any thematic or sectoral fund, entering and exiting at the most profitable time on a consistent basis is of paramount significance which is not possible.

In the long run, IT sector funds are no different than other equity mutual funds when it comes to returns but they can be extremely volatile in the short run and it is unfortunately during this very short cycle that most people enter and exit leaving them with little to no gains.

IT sector stocks usually have the second or third largest allocation in the most popular categories like multi cap, flexi cap, large cap, mid cap and large & mid cap fund schemes, therefore one needs to gauge if the addition of an IT sector fund separately adds any meaningful value to the overall portfolio.

If you are an investor then invest and if you are a trader then trade but do not try to trade where and when you should be investing since that never ends well.

Should you invest in a Sectoral Fund?

If you do, consider the following points before diving in:

Minimal Exposure

A sectoral mutual fund should have limited exposure in your mutual fund portfolio.

It should be a part of your satellite portfolio and never be a part of your core portfolio.


Understanding the sector

Only invest if you do and can understand the sector well.

This involves being able to understand reasons behind past performances as well as the ability to forecast future prospects.

This does not involve investing blindly on past performances.


Long Duration

You should consider a sectoral mutual fund scheme only if you are ready to stay invested for the long haul.

This means staying invested for seven years or more.

This is important since sectors go through various phases and cycles.

You should be able to go through all phases and cycles to make meaningful returns.


Entering the fund

As previously mentioned, sectors go through various phases and cycles.

If you enter a thematic or sectoral mutual fund scheme during a peak,  you may most likely be sitting on moderate returns for a considerable amount of time.


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Disclaimer : While due precaution has been undertaken in the preparation of this article, The Mutual Fund Guide or any of its authors will not be held liable for any investments based on the above article. The above article should not be considered financial advice and has been published only for your perusal. Due credit has been given in case wherever required, in case you feel any part violates any rights then do get in touch with us and we shall get it duly removed.  
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