Time to consider IT-based ETFs, MFs seriously

KS Badri Narayanan Chennai | Updated on January 08, 2021

Launching funds with portfolio of overseas stocks, too, will benefit investors

Information technology stocks have been a real game-changer for Indian investors ever since the shares of Infosys Technologies (now Infosys) were listed in 1993. In fact, none of the sectors has given such a consistent high return to investors nor created jobs on such a scale (a plus on the economic front).

The Nifty IT index has given an annualised return of 25 per cent since its inception. The index was computed using the free float market capitalisation method with a base date of January 1, 1996, indexed to a base value of 1,000. Now, the index is ruling at 26,162.40, As against this, the Nifty50's annalised return since its inception (1995) is around 11 per cent.

Cost and tax advantages, supportive government policies, availability of skilled manpower and expansion of technologies in major sectors such as FMCG, telecom, Defence and BFSI helped the IT sector grow by leaps and bounds over the last three decades.

Even after such a spectacular growth, the IT sector still has potential left to grow as there is lot of ground to be covered in various sectors.

3rd wave: Goldman Sachs

Recently, global investment and advisory firm Goldman Sachs, which resumed its coverage of Indian information technology companies, also said digitalisation at scale and Covid-19’s acceleration of ‘work from anywhere’ have boosted technology demand across industry verticals and geographies. “Moreover, we note that IT outsourcing has seen strong pick-up (lasting at least two years) after previous crises (such as Y2K and the GFC). These factors support our forecast of a third wave of IT outsourcing in FY21-23,” said Goldman Sachs analysts Sumeet Jain and Saurabh Thadani in a report.

Domestic broking firm JM Financial too said that its industry checks continue to suggest a strong demand uptick on the ground.

“We believe that Indian techs are likely to see a strong FY22 ( possibly better than street estimates), albeit the supply situation needs watching. We continue to back 'Improvement in growth and margins for the foreseable future’”.

Only a few ETFs

However, when it comes to investments through the mutual fund or the exchange traded fund (ETF) route, there are not many schemes available.

There are only three ETFs — ICICI Prudential IT, Nippon India ETF Nifty IT and SBI ETF IT — based on information technology theme and just a handful of mutual funds based on IT and Digital India. This forces nvestors to dabble directly either in stock or derivative products, leaving them exposed to elevated risk.

Fund houses may actively consider launching more ETF schemes based on IT. Besides, a few schemes can also be launched with a marginal exposure to overseas IT stocks such as Apple, Microsoft, and Facebook.

The National Stock Exchange should also consider relaunching derivative contracts on Nifty-IT index, which was withdrawn from June, as the index failed to meet some of SEBI’s trading criteria. This will also help some smart traders, who wish to take a leveraged exposure for a longer duration.

Published on January 08, 2021

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