Technology funds make a comeback

To ride out market volatility, investors are turning to defensive bets such as IT and FMCG

The steady rise in the Nifty IT index in the last quarter of calendar year 2017 and a strong gain of 11.3 per cent this January have brought technology-based funds back in focus again. These funds have delivered an average of 17.5 per cent return over the past three months, amid volatility in the broader market, as the fancied small- and mid-cap stocks have started to lose sheen.

With the valuations of most of the cyclical stocks sky-rocketing during the market rally in 2017, investors are turning to defensive bets such as IT and FMCG, to ride the volatility in the market.

Equity-oriented technology funds have done well over the last three and six-month period.

These funds are benchmarked against S&P BSE IT and S&P BSE Teck. They invest in the stocks of technology and technology-related companies. There are five funds in this category, namely Aditya Birla Sun Life New Millennium, Franklin India Technology, ICICI Prudential Technology, SBI IT and Tata Digital India.

These funds have assets under management (AUM) in the ₹73 crore-₹335 crore range and expense ratio ranging from 2.65 per cent to 2.92 per cent.

Key stocks

Infosys is the top holding stock across the funds. It constitutes between 14 per cent and 32 per cent of the funds’ portfolio. A strong rally of 17 per cent in the stock over the past three months has boosted the returns of technology funds.

Other key stocks in the funds’ portfolio such as TCS, Tech Mahindra, and HCL Technologies have also delivered good returns, aiding funds’ performance over the last six months to one year. While Aditya Birla SL New Millennium and Tata Digital India have given above 30 per cent returns over the last one-year period, SBI IT and Franklin India Technology have been laggards within the category.

The reasons for the underperformance of Franklin India Technology could be multiple. One, about 8.8 per cent of its assets is allocated to Franklin Technology Fund (foreign mutual fund) that has been underperforming its benchmark — MSCI World Information Technology Index — over the past six months. Two, Franklin India Technology’s investments in US-listed technology stocks such as MakemyTrip, Facebook and Tesla Inc have underperformed Indian IT stocks over the past one year.

Although SBI IT has top performing technology stocks such as Infosys, TCS, Tech Mahindra, Cyient in its basket, lacklustre performance of stocks such as Newgen Software Technologies, Oracle Financial Services Software and Accelya Kale Solutions has capped returns.

Key drivers

Both Aditya Birla SL New Millennium and Tata Digital India have clocked above 30 per cent returns over the last six months, which has been a key driver for robust one-year return.

Betting on Sterlite Technologies, Sonata Software, a mid-cap IT stock, and Majesco, a small-cap software company, boosted the returns of Aditya Birla SL New Millennium.

Persistent Systems and NIIT Technologies also supported the fund’s performance.

For Tata Digital India, the strong surge in the stocks of Tata Elxsi, MindTree, Tech Mahindra, and Sonata Software helped the fund deliver excellent returns, along with the good performance of Infosys and TCS.

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