IT companies: Go for tried-and-tested scrips

The sector is holding up quite well at present, but don’t overplay your hand by investing aggressively in it

After a rough 2017, information technology (IT) stocks seem to be making a comeback. In the past three months, the Nifty IT index is up 8.73 per cent – the most among all sectoral indices. The benchmark index, Nifty-50, is down 1.89 per cent over the same period. Even mutual funds schemes investing in the sector have not disappointed. The category average returns of technology funds is 9.25 per cent.

Compare these with returns in 2017 when the sector was a laggard.

The S&P BSE IT index returned 10.83 per cent whereas the S&P Sensex rose 27.91 per cent.

So what explains this turnaround in fortunes? Kaustabh Belapurkar, director manager research, Morningstar Investment Adviser India, says that one of the key reasons for the improvement in performance is the fact that the sector was a laggard in 2017 and is now catching up with others. Also, improvement in the US economy has led to hopes that there will be rise in discretionary spending by companies on IT there, which will benefit Indian IT companies. Arun Kejriwal, director, Kris Securities, adds that the market expects some improvement in profits of information technology companies due to expectations of further fall in the rupee against the dollar.

The sharp turnaround is good news for investors who are holding on to these stocks or mutual fund schemes. But there is always some risk associated with sector-specific funds, given the high concentration of these schemes. For example, most IT-specific funds’ top three stocks would account for 25-60 per cent of the portfolio – a clear worry if the tide turns. No wonder, investment experts are of the view that only those who are capable of taking higher risks should opt for these schemes. Regular investors would be better off investing in safer diversified equity funds. These funds will anyway have some exposure to the bigger companies in the sector, such as Tata Consultancy Services and Infosys. Only investors who are well-versed with the IT sector are better off buying these stocks and schemes aggressively because they understand the benefits and pitfalls better.

Says Belapurkar: “These funds are not for every investor. Don't be swayed by past performance. The returns from these funds tend to be very lumpy. The returns may look good over a one-year period currently, but if you had looked at the returns of these funds prior to January, they would have been poorer compared to the rest of the market.”

So, don't be swayed by past returns in these funds. Invest only if you have a view on the sector, and if you have the stomach to take the high risk in these concentrated bets. If you are a new investor and are impressed with the sector’s performance, invest through a mutual fund scheme.

Kejriwal believes that besides the IT sector, one should look at stocks in the broader market also as it is down over 10 per cent from its highs, thereby providing good opportunities. On Wednesday, the S&P Sensex closed at 33,019 points – down 351 point or 1.05 per cent. Clearly, investors can get good stocks in the broader market. If you wish to stick to IT companies, he suggests picking tried-and-tested large caps. Don’t go searching for a multi-bagger amid mid- and small-cap stocks. Also, limit your sector exposure to five-10 per cent.